The U.S. Energy Department's weekly inventory release showed another larger-than-expected increase in natural gas supplies. The bearish injection, which was also higher than the five-year average, intensified a sell-off that left the U.S. benchmark with its lowest close in three years.

Analysis: Another Massive Supply Build

Stockpiles held in underground storage in the lower 48 states rose by 119 billion cubic feet (Bcf) for the week ended May 31, above the guidance (of 111 Bcf gain) as per the analysts surveyed by S&P Global Platts. Moreover, the increase was higher than the five-year (2014-2018) average net injection of 102 Bcf and last year’s increase of 93 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 1.986 trillion cubic feet (Tcf) - 182 Bcf (10.1%) above 2018 levels at this time but 240 Bcf (10.8%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged around 94.2 Bcf per day, essentially unchanged on a weekly basis even as dry production fell by 1%. Meanwhile, daily consumption increased 2.4% to 81.1 Bcf primarily due to strong power sector demand.

Natural Gas Prices Hit Fresh 3-Year Low

Natural gas futures extended losses on Thursday to touch fresh three-year lows – following a 1.6% drop in the previous session on Wednesday – after U.S. government data revealed a weekly injection in domestic stockpiles that was much more than expected. The commodity edged lower by 5.4 cents yesterday, at $2.324 per MMBtu, after earlier dropping to a new low since June 2016 at $2.305 per MMBtu. Natural gas is now 38% down from its Jan 15 high of $3.722 per MMBtu.

Can it Rebound?

The fundamentals of natural gas consumption continue to be favorable. The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.

However, record high production in the United States and expectations for explosive growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements. Also, with the traditional withdrawal season (when supplies fall on heating demand due to cold weather) having ended in March and predictions for a cooler early summer, consumption is likely to decline in the near term.