Advertisement
New Zealand markets closed
  • NZX 50

    11,864.89
    -7.75 (-0.07%)
     
  • NZD/USD

    0.6133
    -0.0038 (-0.62%)
     
  • NZD/EUR

    0.5736
    -0.0005 (-0.09%)
     
  • ALL ORDS

    7,974.80
    -27.70 (-0.35%)
     
  • ASX 200

    7,724.30
    -25.40 (-0.33%)
     
  • OIL

    78.79
    +0.17 (+0.22%)
     
  • GOLD

    2,348.70
    +30.70 (+1.32%)
     
  • NASDAQ

    19,576.92
    +111.74 (+0.57%)
     
  • FTSE

    8,146.74
    -16.93 (-0.21%)
     
  • Dow Jones

    38,647.10
    -65.11 (-0.17%)
     
  • DAX

    18,015.42
    -250.26 (-1.37%)
     
  • Hang Seng

    17,941.78
    -170.85 (-0.94%)
     
  • NIKKEI 225

    38,814.56
    +94.09 (+0.24%)
     
  • NZD/JPY

    96.3560
    -0.4640 (-0.48%)
     

Is the Slump in Natural Gas Rig Count a Boon for Prices?

The U.S. Energy Department's weekly inventory release showed that natural gas supplies increased less than expected. The positive inventory numbers, together with signs of production pullback and upcoming summer demand, buoyed natural gas futures, which settled with a gain week over week.

Despite the increase, the space remains highly susceptible to unpredictable weather patterns, impacting prices and market stability.

At this time, we advise investors to focus on stocks like Coterra Energy CTRA and Cheniere Energy LNG.

EIA Reports a Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 78 billion cubic feet (Bcf) for the week ended May 17, below the analyst guidance of an 82 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 92 Bcf and last year’s growth of 97 Bcf for the reported week.

ADVERTISEMENT

The latest increase puts total natural gas stocks at 2,711 Bcf, which is 402 Bcf (17.4%) above the 2023 level and 606 Bcf (28.8%) higher than the five-year average.

The total supply of natural gas averaged 104.9 Bcf per day, up 0.4 Bcf per day on a weekly basis due to higher shipments from Canada.

Meanwhile, daily consumption fell to 94 Bcf from 94.4 Bcf in the previous week, mainly reflecting a drop in residential/commercial usage that was partly offset by higher natural gas consumed for power generation.

Natural Gas Prices Finish Slightly Higher

Natural gas prices trended northward last week following the lower-than-expected inventory build. Futures for June delivery ended Friday at $2.52 on the New York Mercantile Exchange, up some 1.2% from the previous week’s closing. As a matter of fact, the commodity’s resurgence over the past few weeks wiped out all of its losses since the start of this year.

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, with the Appalachian Basin-focused EQT following on. CHK has decided to curb the second quarter’s gas production expectations by 400 million cubic feet per day (MMcf/d), doubling the previous curtailment announced in March. Separately, EQT — the largest domestic producer of natural gas — said that it will lower its daily output by 1 Bcf through May to combat the supply glut in the U.S. market. According to EQT, the revised plan will likely reduce full-year sales volume to 2,100-2,200 billion cubic feet equivalent (Bcfe) from 2,200-2,300 Bcfe earlier. It appears that these production cut announcements have been partly responsible for driving natural gas prices higher and galvanizing 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, usage of the commodity to generate electricity took a hit. However, predictions of warmer-than-normal weather over most of the United States should boost demand.

Moreover, 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 28% from last year to its lowest level since October 2021. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies, with dry gas output averaging below 100 Bcf per day for six weeks in succession.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries, is supporting natural gas. LNG shipments for export from the United States have been elevated of late, 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 increase in gas flows due to the full restart of the Freeport LNG export plant in Texas has translated into more of the commodity being loaded onto ships. A heatwave blanketing Southeast Asia has also led to a jump in power demand for air conditioning, increasing exports of the super-chilled fuel.

Final Thoughts

The upshot of all these factors — the natural gas market — despite improving, remains an oversupplied one. As mentioned above, it endured a torrid 2023, briefly breaking below the $2 threshold for the first time since 2020. The situation was not much different in early 2024, with the fuel reaching a multi-year low near $1.48 in late March and struggling to sustain a rally over the psychological mark of $2. However, natural gas has staged quite the turnaround in a matter of weeks, and looks to improve even further given the favorable temperature and lower production outlook.

Nevertheless, based on several factors, the space is currently quite unpredictable and spooked by sudden changes in weather and production patterns. As such, investors are advised to still exercise caution and 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 9.8%. Valued at around $20.2 billion, CTRA has risen 15.4% 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 two of the last four quarters and missed in the other two. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 58.9%, on average. LNG shares have moved up 14.2% in a year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report

EQT Corporation (EQT) : Free Stock Analysis Report

Cheniere Energy, Inc. (LNG) : Free Stock Analysis Report

Coterra Energy Inc. (CTRA) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research