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What Did the Latest Inventory Data Do to Natural Gas Prices?

The U.S. Energy Department's weekly inventory release showed that natural gas supplies decreased less than expected. The bearish inventory numbers notwithstanding, futures settled with a slight gain week over week on signs of production pullback.

Despite this spike, the market hasn't been kind to natural gas, with the commodity recently hitting nearly four-year lows due to worries about record output and concerns about a growing glut. At this time, we advise investors to focus on stocks like Coterra Energy CTRA and Cheniere Energy LNG.

EIA Reports a Withdrawal Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 37 billion cubic feet (Bcf) for the week ended Mar 29, below the guidance of a 39 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The decrease compared with the five-year (2019-2023) average net shrinkage of 1 Bcf and last year’s decline of 29 Bcf for the reported week.

The latest draw puts total natural gas stocks at 2,259 Bcf, which is 422 Bcf (23%) above the 2023 level and 633 Bcf (38.9%) higher than the five-year average.

The total supply of natural gas averaged 105.6 Bcf per day, down 0.2 Bcf per day on a weekly basis due to a slump in dry production, partly offset by higher shipments from Canada.

Meanwhile, daily consumption fell to 105.2 Bcf from 114 Bcf in the previous week, mainly reflecting a sizeable drop in residential/commercial usage triggered by reduced space-heating demand in warmer weather.

Natural Gas Prices Still Finish Higher

Natural gas prices trended northward last week despite the lower-than-expected inventory decrease. Futures for May delivery ended Friday at $1.785 on the New York Mercantile Exchange, up some 1.3% from the previous week’s closing. The increase in natural gas realization is the result of a pullback in supply. Nevertheless, the fuel has declined almost 30% this year after tumbling 44% in 2023.

Investors should know that natural gas realization has been under pressure from strong production, elevated stockpiles and tepid weather-related demand. It's worth mentioning that the current inventory levels are well above the year-ago figure and the five-year average. The bearish sentiment surrounding the commodity even prompted shale producers Chesapeake Energy CHK and EQT Corporation EQT to hit the brakes on new drilling.

Chesapeake announced a reduction in its drilling rigs so as to lower volume. The company has decided to cut this year’s gas production expectations by around 20%. Chesapeake’s plans rippled through the market, with Appalachian Basin-focused EQT following on. The explorer and producer of natural gas said that it will lower its daily output by 1 Bcf to combat the supply glut in the U.S. market. According to EQT, the revised plan will likely reduce net production by 30-40 Bcf. While these production cut announcements temporarily sent natural gas prices higher, they have failed to galvanize the market.

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With low heating demand this winter and forecasts turning milder, usage of the commodity to generate electricity has taken a hit.

Having said that, there are signs of curtailment in U.S. production. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down around 30% from last year to its lowest since January 2022. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. As a matter of fact, LNG shipments for export from the United States have been elevated for months, reaching record levels due to environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies due to the war in Ukraine.  

At the same time, the protracted downtime associated with the testing and repairs at the Freeport LNG export plant in Texas has drowned out some of the positives as of now. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — is facing outages at two of its three liquefaction trains until May. Consequently, some of the LNG cargoes due for export are likely to have been diverted to the domestic market despite huge demand abroad.

Final Thoughts

The upshot of all these factors — the natural gas market — remains an oversupplied one. As mentioned above, it endured a torrid year in 2023, briefly breaking below the $2 threshold for the first time since 2020. The situation is not much different in 2024, with the fuel reaching a multi-year low near $1.48 in late March and struggling to cross the psychological mark of $2.  

Based on several factors, the space is currently quite unpredictable and spooked by sudden changes in weather and production patterns. As such, investors are clueless about what to do. As of now, the lingering uncertainty over the fuel means that they should preferably hold on to fundamentally strong stocks like Coterra Energy and Cheniere Energy.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This Zacks Rank #3 (Hold) company churned out an average of 2,262.7 million cubic feet on a daily basis from these assets in 2023.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coterra beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 9.3%. Valued at around $21.3 billion, CTRA has risen 10.4% in a year.

Cheniere Energy: Being the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy enjoys a distinct competitive advantage.

Cheniere Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 64.7%, on average. LNG shares have moved up 2.1% in a year.

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