Natural Gas Storage Still On Sustainable Path

May.10.12 | About: The United (UNG)

Today we had yet another EIA Weekly Natural Gas Storage Report, showing a 30 bcf build. Again, this is well below normal for this point in the injection cycle, with the usual values being in the 70-100 bcf range. Inventories that were as high as 55% over the last year and the five-year average now sit 44.2% above last year and 44.5% over the five-year average.

More important still, if this present trajectory is held during May, it will already represent an improvement over my own expectations when I turned positive in natural gas (NYSEARCA:UNG) back in April 24. Back then, in my article "Natural Gas In 2012: Electric Generation Switch Implications" I also estimated monthly builds, with May being the most aggressive month showing a 367 bcf estimated build. Now, such a build would come to 75 bcf per week (using 4.5 weeks/month). Since we're seeing builds in the 30s, there's a good chance that natural gas will get some leeway to have higher than estimated builds later. Below I reproduce the table with the model, again:

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On EIA's report, the trajectory the inventories are following is already visible as being a lot less steep than what we saw last year or in the five-year range:

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The developments continue to be supportive of the thesis that we'll see higher natural gas prices during 2012. Besides being positive for natural gas itself, this is also positive for companies and sectors whose economics improve when natural gas goes higher.

One such sector is coal (NYSEARCA:KOL), since natural gas is its main competitor in electricity generation and since the power prices usually get set in the margin by natural gas-fired generators. Here my favorites are Cloud Peak Energy (NYSE:CLD) and Arch Coal (ACI), due to their Powder River Basin exposure.

Another sector favored by rising natural gas prices is nuclear generation. Again, since natural gas sets the power price at the margin and nuclear does not see higher costs, these companies come out ahead. Two of my favorites here are Exelon (NYSE:EXC) and Public Service Enterprise Group (NYSE:PEG).

Disclosure: I am long EXC.

Additional disclosure: I am also long natural gas futures.