Natural Gas Investors Hope for a Double Dose of Good News

Energy investors are eagerly awaiting Wednesday afternoon's report from the American Gas Association, which will detail the latest data on natural gas storage. Many traders are hoping that another bullish report will re-energize the recently powerless energy sector.

While energy has struggled because a weakening economy has toppled demand for crude oil and natural gas, recent reports suggest energy demand may be rekindling. Tuesday's report from the American Petroleum Institute showed that crude-oil inventories dropped by more than 5 million barrels, a much larger withdrawal than the 1.5 million expected by analysts and the second strong report in as many weeks. Including data revisions from previous weeks, the decline pushed 10 million barrels, well above the 1-2 million barrels that is normal for this time of year.

"The API number looks solid," says Dan Pickering, director of energy research at Simmons & Co. International, a Houston-based energy research boutique, and a member of the TSC Energy Roundtable. "Tuesday's data was clearly a positive. It's letting you know that demand is OK, at least in the United States."

Gas: Hope or False Promise?

Next up is Wednesday afternoon's report on natural gas inventories from the American Gas Association. While commodity traders key on the weekly AGA number, this week's data will be received by a larger, more interested audience.

Energy investors are hoping for confirmation that last week's report -- that only 3 billion cubic feet, or bcf, of gas was placed into storage -- wasn't an anomaly. With analysts looking for storage over 70 bcf last week, the 3 bcf number was shocking.

"Last week's AGA number was the single-most important data point I can ever remember," says Bryan Dutt, principal with Ironman Energy Capital and a TSC Energy Roundtable member. "I have never seen everyone react to a single data point like they did to this number in my 20 years in the business."

An intraday chart of the Philadelphia Stock Exchange Oil Service Index, or OSX, shows the reaction to the data, usually reported between 2 p.m. and 3 p.m. ET Wednesdays. Last week, the index moved nearly 5% when the bullish number was released.

When AGA Speaks, Investors Listen The Philadelphia Stock Exchange Oil Service Index reacted sharply to last week's report

Not only did energy-services companies like Halliburton (HAL) and Baker Hughes (BHI) react to the news, but exploration and production companies like Anadarko (APC) also rallied.

However, the low injection number caused skepticism that the data was either incorrect or an aberration as a result of weather -- excessive heat in the Midwest and Northeast as well as Hurricane Barry -- leaving some gas unable to make it to storage from the Gulf of Mexico.

"Last week appears almost completely explainable by weather," says Marshall Adkins, director of energy research at Raymond James and a member of the TSC Energy Roundtable. "We calculate storage growth would have been closer to 75 to 80 bcf if you hadn't seen such a surge in electricity demand."

While this week's AGA report will most likely show storage above last week's anemic level, a look at one set of data predictive of gas demand suggests the number could disappoint investors.

"Heating-degree days were lower last week than they were two and three weeks ago, and the AGA posted injections of 75 and 80 bcf for those weeks," notes Jeff Dietert, natural gas analyst at Simmons and also a TSC Energy Roundtable member. If the relationship holds, investors looking for another blockbuster number are likely to be disappointed. "If it comes in that range, inventories are still growing substantially above previous years, and that is not a positive for the stocks."

But what, if like last week, the number surprises everyone? Dutt thinks the rally could be powerful. "If this week's number is shockingly low, I think the OSX could go to 100," he says. "It would be a free-for-all for the stocks as it would validate last week's data. You would see at least a 10% move in the stocks across the board."

While Dutt doesn't know what the number will bring, he's willing to handicap the reaction. "The bullish-bearish breakpoint is 60 bcf," he says. "If it is below that, it will be viewed as a good number. Above that, and it is bearish as hell."

Trend Watching

While the past two weeks of API data provide a positive snapshot of oil demand and the AGA data holds hope of the same, analysts caution not to read too much into limited data.

"We are sitting around trying to guess a number that is in a series of numbers," says Pickering. "The trend is still worse than historical norms. There is still a lot of natural gas in storage."

Pickering makes a salient point. If injections of 70 bcf continue through the balance of summer and fall, gas storage will be full to overflowing when winter arrives. Then, it will take an unusually cold winter to push gas prices above the $3 to $4 range.

Still, investors wait eagerly for Wednesday afternoon's AGA report. So will Marshall Adkins at Raymond James, but only as a data point in a much larger picture. "Even if this number is 50 bcf or lower, I want to see next week's number before I start to get excited," he says. "I want at least three weeks of trend before I believe demand may really be starting to come back."

For hungry energy investors, two weeks may be enough.

Powerful Briefs

If you just can't get enough of energy, check in this weekend as we present the latest edition of the semiannual TSC Energy Roundtable. Six energy pundits work to make sense of the topsy-turvy oil, natural gas and power markets, including their best ideas to make you money in the months ahead.

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