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Natural Gas Gains 4.2% for the Week: What's Behind the Rise?

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The U.S. Energy Department's weekly inventory release showed the season’s first triple-digit withdrawal from natural gas storage. While the draw was not as big as expected, favorable weather predictions and record liquefied natural gas (“LNG”) feedgas deliveries meant that the U.S. benchmark finished the week up more than 4%.   

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

EIA Reports a Withdrawal Lower Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell by 122 billion cubic feet (Bcf) for the week ended Dec 11 compared to the guidance (of a 127 Bcf decline). However, the decrease was above the five-year (2015-2019) average net shrinkage of 105 Bcf and last year’s drop of 97 Bcf for the reported week.

The latest official data puts total natural gas stocks at 3.726 trillion cubic feet (Tcf) — 284 Bcf (8.3%) above the 2019 levels at this time and 243 Bcf (7%) higher than the five-year average.

Total supply of natural gas averaged 95.7 Bcf per day, essentially unchanged on a weekly basis as higher dry production was offset by lower shipments from Canada.

Daily consumption — at 112.2 Bcf — remained flat too, with an increase in residential/commercial gas usage offset by a dip in power demand.  

Natural Gas Price Gains Despite the Below-Consensus Inventory Pull

Natural gas prices rose last week despite the lower-than-expected inventory draw. Futures for January delivery ended Friday at $2.70 per MMBtu on the New York Mercantile Exchange, up 4.2% from the same time previous week. The increase in the price of natural gas (despite the smaller-than-anticipated inventory draw) is the result of the ongoing strength in LNG demand and forecast models, indicating severe cold in the Christmas week, which translates into larger draws due to increased use of heaters.

Wrap Up

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With the latest models showing bullish changes toward a chiller outlook, prices are expected to trend higher. But with stockpiles still bloated, downside risks would continue to outweigh the upside potential unless the weather pattern flips significantly to colder for natural gas usage to rise. 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.   

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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