The US Department of Energy’s weekly inventory release showed that natural gas inventories rose more than expected. The pessimistic inventory numbers, along with supply and weather headwinds, impacted natural gas futures, which closed with losses week after week.
In fact, the commodity is currently trading around the low $2 mark. Given that the space remains highly vulnerable to unpredictable temperature patterns that impact prices and market stability, we currently advise investors to focus on stocks like Coterra Energy CTRA and Cheniere Energy Liquefied natural gas (LNG).
EIA reports a build that exceeds market expectations
Inventories stored in underground storage in the Lower 48 states rose 35 billion cubic feet (Bcf) in the week ended August 16, beating analysts’ forecast of 28 Bcf. The increase compares to the five-year average net inflow (2019-2023) of 41 Bcf and last year’s growth of 23 Bcf for the reporting week.
The weekly build brings total natural gas inventories to 3,299 Bcf, 221 Bcf (7.2%) above the 2023 level and 369 Bcf (12.6%) above the five-year average.
Total natural gas supplies averaged 107.8 Bcf per day, unchanged on a weekly basis.
At the same time, daily consumption increased from 99.3 Bcf in the previous week to 100.5 Bcf, mainly due to higher natural gas consumption for electricity generation.
Natural gas prices close lower
Natural gas prices trended lower last week following a larger-than-expected build in inventories. Futures for September delivery closed Friday on the New York Mercantile Exchange at $2.02, down 4.8% from the previous week’s close. The decline in natural gas realizations is also due to forecasts of milder weather. It is important to remember that the commodity price has fallen more than 35% in the last two and a half months, after rising about 47% in April and May.
Investors should note that natural gas prices are under pressure due to strong production, high inventories and weak demand due to the weather. Current inventories are well above last year’s figures and the five-year average. This pessimistic forecast has APA Society APA and EQT Corporation EQT slows down new drilling.
APA plans to cut natural gas production by 90 million cubic feet per day (MMcf/d) in the third quarter, after already cutting by 78 MMcf/d in the second quarter due to weak prices. Similarly, EQT, the largest U.S. natural gas producer, will reduce its daily production by about 0.5 Bcf in the second half of the year.
Interestingly, some of these companies had only just begun to restart their previously postponed production after prices recovered in April and May. However, the increased production has put renewed pressure on natural gas prices.
Meanwhile, a stable demand catalyst in the form of continued strong LNG gas supplies is supporting the natural gas market. LNG supplies for export from the US have been increasing recently due to environmental concerns and Europe’s efforts to break away from dependence on Russian natural gas supplies due to the war in Ukraine.
Final thoughts
The natural gas market remains oversupplied and is struggling with the aftermath of a difficult 2023, when the price briefly fell below $2 for the first time since 2020. This year, the fuel hit a multi-year low of $1.48 in March and struggled to stay above the $2 mark.
Although there was a brief recovery in natural gas thanks to favorable weather and a reduction in production, prices have fallen again and producers are being forced to make further volume cuts.
Given these unpredictable changes, the market remains volatile and sensitive to sudden weather and production changes. Investors are advised to remain cautious and hold fundamentally strong stocks such as 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, Texas, the company owns approximately 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This Zacks Rank #3 (Hold) company produced an average of 2,262.7 million cubic feet per day 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 in two of the last four quarters and missed it in the other two, averaging 5.9%. CTRA, valued at around $17.9 billion, has fallen 13.3% in a year.
Cheniere Energy: As the first company to receive regulatory approval to export liquefied natural gas from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy has a distinct competitive advantage.
Cheniere Energy beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two. This No. 3-ranked natural gas exporter surprised with earnings of about 55.9% on average over the trailing four quarters. LNG shares are up 13.2% in a year.
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