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Here's Why Natural Gas Lost 11% Past Week Despite a Big Draw

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The U.S. Energy Department's weekly inventory release showed a higher-than-expected decrease in natural gas supplies. Despite the big draw — largest of the season so far — the prospect of less heating consumption due to unfavorable changes in the weather data pulled back the U.S. benchmark around 11% 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 Pull Stronger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell by 187 billion cubic feet (Bcf) for the week ended Jan 15 compared to the guidance of a 177 Bcf decline. The decrease was also above the five-year (2016-2021) average net shrinkage of 167 Bcf and last year’s drop of 97 Bcf for the reported week.

The latest official data puts total natural gas stocks at 3.009 trillion cubic feet (Tcf), which is 36 Bcf (1.2%) above the 2020 levels at this time and 198 Bcf (7%) higher than the five-year average.

Total supply of natural gas averaged 96.1 Bcf per day, edging down 0.4% on a weekly basis due to a decrease in shipments from Canada.

Meanwhile, daily consumption fell 4.7% to 112.7 Bcf from 118.2 Bcf in the previous week, dragged down by a decrease in residential/commercial gas usage and a decline in power demand.

Natural Gas Price Drops Despite the Above-Consensus Inventory Draw

Natural gas prices fell last week despite the higher-than-expected inventory draw. Futures for February delivery ended Friday at $2.446 per MMBtu on the New York Mercantile Exchange, down roughly 11% from the same time previous week. The decrease in the price of natural gas (despite the larger-than-anticipated inventory draw) is the result of forecast models, indicating milder-than-normal weather in the days ahead, which translates into smaller draws due to less 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 bearish changes toward a less chiller outlook, prices are expected to trend lower. 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. While growing LNG exports and lower production are providing some support for a price recovery, it will be the magnitude of 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) , Antero Resources (AR - Free Report) , Southwestern Energy Company (SWN - Free Report) etc. Others like Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report) are further down the pecking order, with a Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell), respectively.

If you are still 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 #2 (Buy) company indicates 34.4% 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 2 — 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 in debt payments, robust financing power and the ability to increase stock repurchases.

The 2021 Zacks Consensus Estimate for this company indicates 200.4% earnings per share growth over 2020.

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