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Natural Gas Gains 16% in 2020: Will It Climb Further in 2021?

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Natural gas prices rose 4.8% on the last trading day of 2020, notching the biggest annual gain in four years. To be precise, the fuel closed out 2020 with a climb of 15.5% — its best 12-month performance since 2016 — supported by lower U.S. production and strong liquefied natural gas (“LNG”) deliveries. But despite seeing a banner year, there’s a lot of uncertainty surrounding the price trajectory of the commodity in 2021.

In this short piece, let’s analyze the natural gas market in 2020 — a year of intense volatility caused by the COVID-19 pandemic — and what could happen in 2021.

2020: A Year of Wild Price Swings

The natural gas industry entered 2020 with the wind seemingly out of the sails. The commodity price was barely above the $2 level, pulled down by growing worries over record output, soaring flaring levels and concerns of a supply glut.  

Natural gas continued to face bearish pressure in the first quarter of 2020 with warmer-than-expected winter weather playing spoilsport and taking the price below the psychologically important level of $2.

Then came the coronavirus pandemic, which actually helped natural gas prices recover somewhat on prospects of lower volumes. Per industry observers, the brake in skyrocketing shale oil production growth — tied to the crude price collapse — also limited associated gas output, thereby snapping the massive supply glut. However, the perceived economic benefit of the pandemic was offset by slowdown in the fuel’s consumption due to the crisis.

As a matter of fact, natural gas futures collapsed to a 25-year low below $1.50 per MMBtu in late June, due in part to an ongoing supply glut made worse by the coronavirus-induced drop off in usage.

In a stunning rebound, U.S. natural gas prices posted a gain of 44% for the July-September period — the largest quarterly increase since the April-June period of 2016. The revival traced 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. By the end of October, natural gas peaked at around $3.40.   

However, the commodity has lost more than 25% in value since then on consistently milder-than-normal temperatures, which translates into smaller draws due to less use of heaters.  

The Outlook for 2021

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With the latest models showing bearish changes toward a less chiller outlook, prices are expected to trend lower in the near term. As it is, 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.

Meanwhile, the decline in production (on account of lower associated volumes and a downturn in exploration and production capital expenditures) may continue to support prices. As a proof of the supply drop, natural gas output remains curtailed, with domestic volumes receding more than 5% year over year. So, we have a tighter market going into 2021.

The steady improvement in shipments of LNG for export has also facilitated the natural gas market. Volumes flowing to LNG export plants dropped to multi-month lows in the third quarter due to weak international demand and hurricane-related disruptions in the United States. However, there has been a sustained increase in feed gas volumes over the past few months on the back of a better demand outlook. So much so that LNG exports from the United States reached a new all-time high in December.

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 foreseeable 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) , 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).

If you are still looking for a near-term natural gas play, CNX Resources (CNX - Free Report) might be a good selection. The Appalachian Basin operator — with a Zacks Rank #2 (Buy) — has an excellent earnings surprise history, having surpassed estimates in each of the last four quarters by 211.52%, on average.

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

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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