Natural gas in storage fell another 57 Bcf (billion cubic feet) last week (ending March 21), hitting 896 Bcf compared to a five-year average of 1824 Bcf at this time of year, and this week the level is expected to drop below 820 Bcf, which should be supportive of natural gas prices for most of the year.

US unlikely to hit average natural gas levels by November

“Generally speaking, we remain bullish on gassy stocks under coverage, especially as we head into injection season,” write Sterne Agee analysts Tim Rezvan and Truman Hobbes in a March 27 report. They note that operators in the continental US will have to add 3 Tcf of gas by November to get gas levels back up to normal levels, but first quarter gas production growth is expected to be weak or flat, closer to the December level of 74.8 Bcf/day than the 80 Bcf/day rate that is needed to start catching up.

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Rezvan and Hobbes think the companies best positioned to benefit from the upside volatility in gas prices (all Buy rated) are Rice Energy Inc (NYSE:RICE), QEP Resources Inc (NYSE:QEP), Gulfport Energy Corporation (NASDAQ:GPOR), Southwestern Energy Company (NYSE:SWN), and Petroquest Energy Inc (NYSE:PQ).

Natural gas companies have more time to benefit from rising demand

While the rest of the economy has taken a hit, gas companies have benefited enormously from the harsh weather as the glut of natural gas had been undercutting prices over the last few years. At this time last year, natural gas companies were burning cash, and even though there were some trends toward higher demand (coal-firing power plants switching to gas; increased use of gas in public transportation), most people expected them to have a rough couple of years in the meantime.

By allowing the sector to get rid of so much excess capacity, the unusually cold winter has practically given it a new lease on life. The trends toward higher demand for natural gas are still in place, but companies are now in a much better situation to wait for demand (and infrastructure) to catch up with rising production. It seems unlikely that they will be able to catch up with the five-year average level before next winter starts, and as the mix of energy use continues to change over the next few years it becomes less likely that another glut like the one we saw last year will be able to build up.