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What Sparked Off Last Week's Pullback in Natural Gas Prices?

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The U.S. Energy Department's weekly inventory release showed a lower-than-expected decrease in natural gas supplies. This bearish withdrawal, coupled with unfavorable weather predictions, meant that the U.S. benchmark lost more than 9% last week.   

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

EIA Reports a Small Withdrawal in Inventories

Stockpiles held in underground storage in the lower 48 states fell by a mere 1 billion cubic feet (Bcf) for the week ended Nov 27, compared to the guidance (of a 13 Bcf decline). The decrease was also below the five-year (2015-2019) average net shrinkage of 41 Bcf and last year’s drop of 22 Bcf for the reported week.

The latest official data puts total natural gas stocks at 3.939 trillion cubic feet (Tcf) — 343 Bcf (9.5%) above the 2019 levels at this time and 290 Bcf (7.9%) higher than the five-year average.

Total supply of natural gas averaged 95.8 Bcf per day, essentially unchanged on a weekly basis as lower dry production was offset by higher shipments from Canada.

Meanwhile, daily consumption was up 7.6% to 103.2 Bcf compared to 95.9 Bcf in the previous week primarily due to higher heating loads. In particular, residential/commercial gas consumption surged around 17% from the previous week to average 30.5 Bcf per day.

Natural Gas Price Drifts Lower

Natural gas prices fell last week following the lower-than-expected inventory draw. Futures for January delivery ended Friday at $2.575 per MMBtu on the New York Mercantile Exchange, down 9.4% from the same time previous week. The decline in the price of natural gas is also the result of forecast models, indicating a mild winter in December, which translates into smaller draws due to less use of heaters.

Looking Ahead

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. Therefore, fears of a warm winter are expected to leave stockpiles bloated and cap prices. While growing LNG exports and lower production are providing some support for a price recovery, it will be the magnitude of the cold across the United States that will dictate the energy commodity’s future. In other words, downside risks would continue to outweigh upside potential unless the weather pattern flips to colder for natural gas usage to rise.   

The lingering uncertainty over the heating fuel means that most natural gas-focused companies carry a Zacks Rank #3 (Hold). As a result, investors should preferably wait for a better entry point before buying shares in EQT Corporation (EQT - Free Report) , SilverBow Resources (SBOW - Free Report) , Cabot Oil & Gas Corporation (COG - Free Report) , CNX Resources (CNX - Free Report) , Southwestern Energy Company (SWN - Free Report) etc. Others like Comstock Resources (CRK - Free Report) and Range Resources (RRC - Free Report) are further down the pecking order, with a Zacks Rank #4 (Sell).

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

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