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Natural Gas Storage Rises, Investors Stay Focused on Weather

The U.S. Energy Department's weekly inventory release showed a higher-than-expected increase in natural gas supplies, which is seen as bearish for the price of the energy commodity.

In fact, the market hasn't been kind to natural gas in 2023, with the commodity trading considerably lower year to date and briefly breaking below the $2 threshold for the first time since 2020.

Because of uncertainty around weather-related demand at this time, we advise investors to focus on stocks like Chesapeake Energy CHK, Coterra Energy CTRA and Cheniere Energy LNG.

EIA Reports a Larger-Than-Anticipated Build

Stockpiles held in underground storage in the lower 48 states rose 90 billion cubic feet (Bcf) for the week ended Sep 22, above the analyst guidance of an 88 Bcf addition per a survey conducted by S&P Global Commodity Insights.

The build compared with the five-year (2018-2022) average net injection of 84 Bcf and last year’s growth of 103 Bcf for the reported week.

The latest increase puts total natural gas stocks at 3,359 Bcf, which is 397 Bcf (13.4%) above the 2022 level at this time and 189 Bcf (6%) higher than the five-year average.

The total supply of natural gas averaged 106.1 Bcf per day, edging up 0.2 Bcf per day on a weekly basis due to a slight increase in shipments from Canada.

Meanwhile, daily consumption fell marginally to 93.6 Bcf from 93.8 Bcf the previous week, mainly reflecting lower deliveries to LNG export terminals, offset by a pickup in power burn and residential/commercial usage.

Natural Gas Price Fundamentals

Natural gas futures for November delivery ended yesterday at $2.945 on the New York Mercantile Exchange. The commodity is down around 35% so far this year.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. This adds significant uncertainty as to the scale and durability of the commodity’s demand.

With forecasts for benign weather in the days ahead, usage of the commodity to generate electricity to meet heating/cooling demand is expected to be tepid.

However, on a positive note, there are signs of curtailment in domestic output. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down more than 26% from last year. 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. While falling from their April highs, LNG shipments for export from the United States have been elevated for months on the back of environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies following the war in Ukraine. Furthermore, with union workers calling off strikes at LNG facilities in Australia, flows to export plants should pick up again.

Final Thoughts

Based on several factors, the space is currently quite unpredictable and spooked by the 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 opt for holding on to fundamentally strong stocks like Chesapeake Energy, Coterra Energy and Cheniere Energy.

Chesapeake Energy: Chesapeake has a premier portfolio with more than 15 years of inventory spread over some 2,200 locations, and around 90% of its total output comprises natural gas. This company’s exposure to premium markets and focus on costs and margins should help it to benefit from any increase in natural gas prices.

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. The company churned out an average 2,204 million cubic feet on a daily basis from these assets in 2022.

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 certainly enjoys a distinct competitive advantage.

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