The U.S. Energy Department's weekly inventory release showed a slightly larger-than-expected increase in natural gas supplies. However, the build was well below historical averages for the 20th week in a row, which further narrowed the supply overhang. Importantly, the commodity’s demand continues to be healthy with record usage for gas-fired power in a late-summer surge. The unseasonably warm weather helped natural gas pop through the $3 barrier for the first time in more than a year.

About the Weekly Natural Gas Storage Report

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data: Larger-than-Expected Injection

Stockpiles held in underground storage in the lower 48 states rose by 52 billion cubic feet (Bcf) for the week ended Sep 16, 2016, just above the guidance (of 51 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the increase was significantly lower than both last year’s build of 96 Bcf and the 5-year (2011–2015) average addition of 83 Bcf for the reported week.

Following past week’s rise, the current storage level – at 3.551 trillion cubic feet (Tcf) – is now up 140 Bcf (4%) from last year and is sitting 268 Bcf (8%) above the five-year average.

Natural Gas Prices Fall from 20-Month Highs

Pressured by the inventory build, natural gas prices traded down 2.2% to end Thursday at $2.99 per MMBtu. Things were further worsened by predictions of tepid demand with the sudden change in forecasts that showed cooler weather ahead.

Earlier in the week, the commodity rose to $3.057 per MMBtu - a level not seen since Jan 2015. This was mostly on the back of successive below-average builds with strong power sector consumption cutting into the year-over-year storage surplus. In fact, natural gas prices have rebounded strongly (by around 90%) since hitting 17-year lows of around $1.6 per MMBtu in the first quarter.

The price strength has translated into major gains for natural gas-weighted companies including the likes of Cimarex Energy Co. (XEC - Free Report) , EQT Corp. (EQT - Free Report) , Southwestern Energy Co. (SWN - Free Report) , Cabot Oil & Gas Corp. (COG - Free Report) , Range Resources Corp. (RRC - Free Report) and Devon Energy Corp. (DVN - Free Report) .

However, each of these firms has a Zacks Rank #3 (Hold), which does not make them screaming buys. In case you are looking for energy names for your portfolio, one could opt for Carrizo Oil & Gas Inc. (CRZO  - Free Report) . It has a Zacks Rank #1 (Strong Buy).

Long-Term Thesis Positive

Notwithstanding the small weekly setback, natural gas’ fundamentals continue to improve. As discussed above, significantly lower year-over-year injection figures over the past few weeks helped the commodity breach the key psychological level of $3 per MMBtu recently.

With the late summer turning out longer and hotter than normal, natural gas demand has picked up on the back of elevated power sector consumption due to air-conditioning use. Coupled with the easing production from the major shale plays, natural gas prices are set to rise further.

What’s more, the rig count has been falling consistently and is now languishing at 89 – compared to almost 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.

In general, sentiment toward natural gas is likely to become more positive in the near future.