The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. The headline beat, which further widened the storage deficit ahead of the upcoming winter, helped the fuel to remain above the psychologically important $3 level.

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: A Smaller-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 46 billion cubic feet (Bcf) for the week ended Sep 21, well below the guidance (of 61 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. The injection was also lower than both the five-year (2013-2017) average addition of 81 Bcf and last year’s build of 64 Bcf for the reported week.

Per the latest EIA data, the current storage remains well below benchmarks. At 2.768 trillion cubic feet (Tcf), current natural gas inventories are 621 Bcf (18.3%) under the five-year average and 690 Bcf (20%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 89.2 Bcf per day, essentially unchanged on a weekly basis. Meanwhile, daily consumption fell 2.6% to 76 Bcf on weaker power generation demand, which slumped 10.4% week over week.

Natural Gas Price Rallies

Following the light injection, natural gas price gained 2.6% yesterday to settle at $3.056 per MMBtu on Thursday. In particular, traders focused on the widening deficit to the five-year average and low inventory levels following strong summer air-conditioning demand. This year’s sweltering heat meant that cooling degree days averaged 25% above normal, which spurred gas-fired power generation consumption. With the official withdrawal season set to commence in just over a month, the big deficit in natural gas inventories is bullish for prices.        

Positive Long-Term Thesis

The fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.

The EIA predicts global demand for the commodity to grow 43% from 2015 to 2040. Countries in Asia and in the Middle East – led by China’s transition away from coal – will account for most of this increase.

And as the world’s largest gas producer, the United States has emerged as one of the key players – competing with Russia and Australia among others – to meet this soaring demand. With domestic prices struggling to break the $3 per million Btu threshold, American natural gas companies see a big opportunity in selling cheap U.S. production at attractive enough prices to rest of the world. In fact, more than 50% of the domestic volume growth in the near future will be used for export in the form of liquefied natural gas (LNG). As per Paris-based International Energy Agency (IEA), the United States will vie with Australia and Qatar as the top LNG exporter by 2022.

New pipelines to Mexico, together with large-scale liquefied gas export facilities like Cheniere Energy, Inc.’s Sabine Pass terminal and Dominion Energy Inc.’s (D) newly constructed Cove Point export plant, have meant that exports out of the U.S. are set for a quantum leap.

As per the Energy Department, gross liquefied natural gas exports are set to average 2.93 Bcf per day in 2018, increasing more than 50% from last year. Apart from surging exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand.

Finally, if the upcoming (2018-2019) winter turns out to be colder-than-normal, the surge in expected demand in the face of relative deficit of natural gas inventory could trigger a large rally in the commodity's price.

Want to Own a Natural Gas Stock Now?

The secular tailwinds mentioned above could see natural gas eventually settle well above the $3 per MMBtu mark before the end of the winter. The perceived price strength augurs well for natural gas-heavy upstream companies like Cabot Oil & Gas Corporation (COG - Free Report) , Chesapeake Energy Corporation (CHK - Free Report) , Comstock Resources, Inc. (CRK - Free Report) , Eclipse Resources Corporation (ECR - Free Report) , Gulfport Energy Corporation (GPOR - Free Report) and Southwestern Energy Company (SWN - Free Report) . However, each of these firms has a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.

Meanwhile, if you are looking for a near term natural gas play, CNX Resources Corporation (CNX - Free Report) may be an excellent selection. This company has a Zacks Rank #1 (Strong Buy).

CNX Resources is a natural gas-focused exploration and production company with primary focus on the Marcellus and Utica Shales of the Appalachian Basin. More than 90% of CNX Resources’ production is comprised of natural gas. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 42.3% in the same period.