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Natural Gas Prices Are on a Tear But May Go Even Higher

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Natural gas prices traded above $4.70 per million British thermal units (MMBtu) in trading on Friday to finish the week at $4.71 per million British thermal units (MMBtu). That was the highest settlement since November 2018 and came despite cooler temperatures and power outages brought in by Hurricane Ida.

The year’s ninth named storm made landfall in Louisiana on Aug 29, bringing copious rainfall, catastrophic wind damage and power losses for hundreds of thousands of customers. While the Category 4 hurricane significantly disrupted natural gas production from the Gulf of Mexico (GoM), the storm-induced shut ins were offset by reduced demand for the electricity-generating fuel due to power plant outages and relatively cool temperatures.  

Despite the temporary hit to natural gas consumption, the markets have responded primarily to concerns regarding the supply/demand imbalance created through the big declines in the offshore GoM volumes and the slow restoration of production back online. The platform shutdowns dragged production below 90 Bcf on certain days when an average of around 93 Bcf is needed to balance the demand following a record-breaking summer and continued strength in U.S. liquefied natural gas (“LNG”) exports.

In fact, current natural gas stocks — at 2,871 billion cubic feet (Bcf) — are 579 Bcf (16.8%) below the 2020 level at this time and 222 Bcf (7.2%) lower than the five-year (2016-2020) average. The low stockpile levels have buoyed the price of the energy commodity with the apprehension that the market might enter the winter withdrawal season with supplies in storage well below normal.

Besides, investors are focused on the prospect of higher power burn (or cooling demand) by the middle of this month, following the near-term spell of lower temperatures. The latest models are anticipating summer-like sweltering weather in the second half of September, which will drive the commodity’s consumption. With air conditioners likely to run at full throttle and natural gas being the primary U.S. power plant fuel, the pricing outlook appears bullish.

Shipments of LNG for export from the United States should also remain robust on the back of environmental reasons and higher prices of the super-chilled fuel in Asia and Europe.

Overall, given natural gas’ fundamental set-up, prices are expected to stay strong. This should aid gas-weighted producers like Cabot Oil & Gas Corporation , Range Resources Corporation (RRC - Free Report) and Comstock Resources (CRK - Free Report) , while LNG exporter Cheniere Energy (LNG - Free Report) is also primed for growth. Cabot sports a Zacks Rank #1 (Strong Buy), while Range Resources, Comstock Resources and Cheniere carry a Zacks Rank #2 (Buy).

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

For other natural gas operators like Antero Resources (AR - Free Report) , SilverBow Resources (SBOW - Free Report) and EQT Corporation (EQT - Free Report) , investors should wait for a better entry point. Each of them has a Zacks Rank #3 (Hold).