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Natural Gas Futures Stumbled Last Week: Let's Find Out Why

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The U.S. Energy Department's weekly inventory release showed a lower-than-expected increase in natural gas supplies. Despite the bullish numbers, the prospect of less weather-related consumption and an impending storm-induced demand disruption resulted in a 2.5% decline for the U.S. benchmark last week.

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

EIA Reports a Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 16 billion cubic feet (Bcf) for the week ended Jun 11, including the impact of a reclassification of some of the commodity’s supply from working (available in the market) to base that reduced working gas stocks by 51 Bcf. Excluding the adjustment, the build was 67 Bcf compared to the guidance of a 78 Bcf addition. The increase was also below last year’s addition of 86 Bcf for the same corresponding week and the five-year (2016-2020) average net build of 87 Bcf.

The latest injection puts total natural gas stocks at 2,427 billion cubic feet (Bcf), which is 453 Bcf (15.7%) below the 2020 levels at this time and 126 Bcf (4.9%) lower than the five-year average.

Total supply of natural gas averaged 97.9 Bcf per day, essentially unchanged on a weekly basis as lower dry production was offset by higher shipments from Canada.

Meanwhile, daily consumption edged up 0.3% to 87 Bcf from 86.7 Bcf in the previous week, primarily due to higher power burn (or cooling demand) on the back of warmer-than-expected weather in the West.

Natural Gas Registers a Weekly Decline

Natural gas prices trended downward last week despite the lower-than-expected inventory build. Futures for July delivery ended Friday at nearly $3.22 per million British thermal units (MMBtu) on the New York Mercantile Exchange, down 2.5% from the previous week’s closing. The decrease in the price of natural gas is the result of cooler weather predictions in the United States for the days ahead, which would translate into tepid demand for the fuel. Concerns about a storm in the Gulf of Mexico (GoM) threatening demand and a massive revision in the latest government data also played spoilsport.

Wrap-Up

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models are anticipating lower temperature-driven consumption, following which prices went down.

While healthy LNG export is likely to support U.S. natural gas futures, the bulls are facing pressure from apprehensions regarding storm-related power losses and EIA’s record reclassification that took observers by surprise. Nevertheless, it will be the weather conditions across the United States that will primarily dictate the energy commodity’s future.

Therefore, in the coming weeks, natural gas prices would be mostly determined by temperature levels — whether they are lower or higher than average. The heightened uncertainty over the 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) , Range Resources (RRC - Free Report) , Comstock Resources (CRK - Free Report) , Antero Resources (AR - Free Report) , Southwestern Energy Company (SWN - Free Report) , Cabot Oil & Gas Corporation (COG - Free Report) etc.

If you are still looking for near-term natural gas plays, SilverBow Resources (SBOW - Free Report) might be an excellent selection.

A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused exploration and production company. Over 60 days, the Zacks Rank #1 (Strong Buy) company has seen the Zacks Consensus Estimate for 2021 increase 69.2%. SilverBow controls 165,000 net acres in the Eagle Ford and around 80% of its total output comprises natural gas. SilverBow Resources’ exposure to premium markets and focus on costs and margins should help it to benefit from rising natural gas prices.

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

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