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Natural Gas Loses 12.3% for the Week: What Caused the Drop?

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The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The bearish injection, together with an unfavorable weather forecast, sparked a sell-off that left the U.S. benchmark with a loss of more than 12% for the week — the worst since November 2019. 

Let us see how the natural gas situation looks like after the U.S. Energy Department's latest weekly inventory release:

What Does the EIA Data Reveal?

Stockpiles held in underground storage in the lower 48 states rose by 70 billion cubic feet (Bcf) for the week ended Sep 4, higher than the guidance (of 64 Bcf gain). The increase was also above the five-year (2015-2019) average net addition of 68 Bcf but was less than last year’s build of 80 Bcf for the reported week.

The latest uptick puts total natural gas stocks at 3.525 trillion cubic feet (Tcf) — 528 Bcf (17.6%) above the 2019 levels at this time and 409 Bcf (13.1%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 92.8 Bcf per day, essentially unchanged on a weekly basis as higher dry production (due to the resumption of Hurricane-Laura-led shut-ins) was offset by lower shipments from Canada.

On the other hand, daily consumption was down 1.1% to 81.1 Bcf compared to 82 Bcf in the previous week primarily due to weaker demand from the power sector on cooler weather. Meanwhile, natural gas deliveries to U.S. LNG export facilities increased by 1.8 Bcf per day to an average 4.6 Bcf per day.

Disastrous Week for the Commodity

The natural gas futures market slumped following the bigger-than-expected rise in U.S. supplies, with the commodity posting a 12.3% weekly loss and erasing some of the steep gains over the past couple of months associated with warmer weather and higher cooling demand. Futures for October delivery also fell after weather updates showed forecasts of mild temperatures in a number of regions of the Lower 48 U.S. states that would hamper the demand for natural gas.

Natural Gas Market at a Crossroads

Natural gas settled at $2.269 per MMBtu on the New York Mercantile Exchange on Sep 11. Despite the week’s sharp decline, the fuel is up more than 50% since late June when natural gas fell to its lowest level since 1995 due to weak consumption from a warmer-than-expected winter 2019-2020 and a coronavirus-induced drop off in usage. The stunning rebound traces its origins to three factors: a ramp up in air conditioning use on the back of a scorching summer, lower associated gas output tied to the brake in shale oil production growth, and steady improvement in shipments of LNG for export.

However, summer air conditioning use has started to wean with the onset of fall weather. So demand for natural-gas fired generators is likely to decline in the near term. Going ahead, this could lead to higher injections and subsequent pressure on prices.

Is There Any Investment Opportunity?

While the future direction of natural gas’ movement is anybody's guess, it might be prudent for investors to maintain caution in these uncertain times and look for fundamentally sound stocks.

We suggest adding SilverBow Resources (SBOW - Free Report) to your portfolio. A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused E&P company carrying the coveted Zacks Rank #1 (Strong Buy). SilverBow controls 165,000 net acres in the Eagle Ford and 79% of its total output comprises natural gas.

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

Meanwhile, there are Zacks Rank #3 (Hold) natural gas stocks like Range Resources (RRC - Free Report) , Gulfport Energy (GPOR - Free Report) , Cabot Oil & Gas (COG - Free Report) , Comstock Resources (CRK - Free Report) and CNX Resources (CNX - Free Report) that investors may currently retain in their portfolio.

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