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Natural Gas Gains 6.3% Past Week: What's Behind the Rise?

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The U.S. Energy Department's weekly inventory release showed another triple-digit withdrawal from natural gas storage. While the draw was not as big as expected, favorable weather predictions and strong liquefied natural gas (“LNG”) feedgas deliveries meant that the U.S. benchmark finished the week up more than 6%.

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

EIA Reports a Pull Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell by 130 billion cubic feet (Bcf) for the week ended Jan 1 compared to the guidance of a 139 Bcf decline. However, the decrease was above the five-year (2016-2020) average net shrinkage of 115 Bcf and last year’s drop of 48 Bcf for the reported week.

The latest official data puts total natural gas stocks at 3.330 trillion cubic feet (Tcf), which is 138 Bcf (4.3%) above the 2020 levels at this time and 201 Bcf (6.4%) higher than the five-year average.

Total supply of natural gas averaged 97.2 Bcf per day, essentially unchanged on a weekly basis as lower dry production was offset by higher shipments from Canada.

Meanwhile, daily consumption was down 2% to 113 Bcf compared to 115.3 Bcf in the previous week primarily as residential/commercial gas consumption fell 7.5% to average 38.1 Bcf per day.

Natural Gas Price Gains Despite the Below-Consensus Inventory Draw

Natural gas prices rose last week despite the lower-than-expected inventory draw. Futures for February delivery ended Friday at $2.70 per MMBtu on the New York Mercantile Exchange, up 6.3% 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 cooler weather in the days ahead, 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. However, 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 to 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) , 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 looking for near-term natural gas plays, CNX Resources (CNX - Free Report) and Cabot Oil & Gas Corporation (COG - Free Report) might be good selections.

CNX Resources is a leading operator in the Appalachian basin — the most- prolific domestic gas basin — with more than 1.1 million net acres. About 96% of the company’s total output is natural gas. While the company’s low-cost, high-quality inventory should ensure long-term output growth, cash flows will also receive some downside protection from attractive hedges.

The 2021 Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company indicates 41.5% earnings per share growth over 2020.

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

On the other hand, Cabot is an independent gas exploration company with producing properties mainly in the continental United States. The company — with a Zacks Rank of 3 — owns 174,000 net acres in the dry gas window of the Marcellus play. Cabot boasts one of the strongest balance sheets among the natural gas-focused E&P group. The company's total assets are almost double that of its total liabilities, reflecting safety regarding debt payments, robust financing power and the ability to increase stock repurchases.

The 2021 Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company indicates 205.3% earnings per share growth over 2020.

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