The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. Bearish weather predictions and strength in the commodity’s production also pressured the fuel’s price, which lost around 4.8% for the week.

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 Larger-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 63 billion cubic feet (Bcf) for the week ended Aug 31, above the consensus market guidance of 60 Bcf gain. The injection also exceeded last year’s build of 60 Bcf though it was below the five-year (2013–2017) average addition of 65 Bcf for the reported week.

Despite past week’s larger-than-anticipated supply addition, the current storage remains well below benchmarks. At 2.568 trillion cubic feet (Tcf), current natural gas inventories are 590 Bcf (18.7%) under the five-year average and 643 Bcf (20%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 87.9 Bcf per day, essentially unchanged on a weekly basis as the slight increase in production was offset by lower Canadian imports. Meanwhile, daily consumption fell 1.6% to 75.5 Bcf on lower power generation demand.

Natural Gas Price Falls

Following the storage report, prices lost 4.8% last week to settle at $2.776 per MMBtu on Friday. Apart from the headline miss, investors were also spooked by forecasts of moderating weather in the next few weeks that could lead to decrease in the heating fuel’s demand. Unabated production from the Marcellus and Utica shale regions played further spoilsport. In fact, dry gas output in the United States averaged 82.8 Bcf per day over the reporting week, up 15.5% from the year-ago level.

Positive Long-Term Thesis

The fundamentals of natural gas continue to be favorable for 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 3 Bcf per day in 2018, increasing nearly 60% 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.

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) 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.