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Why the Natural Gas Rally Isn't Over Despite Bearish EIA Data

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The U.S. Energy Department's weekly inventory release showed a higher-than-expected increase in natural gas supplies. Despite the bearish inventory numbers, the low stockpile levels and continued strong liquefied natural gas (“LNG”) feedgas deliveries suggest that the fuel’s prices will remain favorable in the short and medium terms. 

EIA Reports a Build Bigger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 118 billion cubic feet (Bcf) for the week ended Oct 1 compared to the 111 Bcf addition guidance, per the analysts surveyed by S&P Global Platts. The increase was also above the five-year (2016-2020) average net build of 81 Bcf and last year’s addition of 75 Bcf for the same corresponding week.

The latest injection puts total natural gas stocks at 3,288 billion cubic feet (Bcf), which is 532 Bcf (13.9%) below the 2020 level at this time and 176 Bcf (5.1%) lower than the five-year average.

The total supply of natural gas averaged 97.7 Bcf per day, edging down 0.3% on a weekly basis as a result of a slight decrease in dry production and lower shipments from Canada.

Meanwhile, daily consumption rose 2.3% to 83.7 Bcf from 81.8 Bcf in the previous week, primarily due to higher power burn (or cooling demand) on the back of warmer-than-expected weather in the Midwest and the South.

Natural Gas Registers a Small Weekly Decline

Natural gas prices trended slightly downward last week following the higher-than-expected inventory build. Futures for November delivery ended Friday at $5.565 on the New York Mercantile Exchange, falling 1% from the previous week’s closing. The decrease in natural gas realization is also the result of a mild weather outlook and Russia’s pledge to increase supplies to Europe to tackle the continent’s price explosion.

Outlook Still Compelling

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models are anticipating moderate temperature-driven consumption, after which prices have gone down a little. Nevertheless, the commodity’s medium-term outlook continues to be favorable.

For starters, the low stockpile levels — well below normal for this time of the year — have been supporting the price of the energy commodity with the apprehension that the market might enter the winter withdrawal season with a supply shortage.

Secondly, LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record higher prices of the super-chilled fuel elsewhere. Most analysts believe that deliveries appear poised for further gains this year on surging consumption in Europe and Asia, especially as we head into winter. The circumstances are particularly dire in Europe where gas supply is running low with the need for a steady refill from the United States ahead of the heating season.

Consequently, the scenario for the primary U.S. power plant fuel is expected to be healthy. In fact, natural gas recently topped $6 MMBtu for the first time since 2014 and reached a 13-year high settlement of $6.312 on Tuesday. As a matter of fact, prices have more than doubled year to date and a staggering 275% from the 25-year lows in June 2020.

Final Words

Overall, given natural gas’ fundamental set-up, prices might ease occasionally but should generally stay strong. The upward trend should aid gas-weighted producers SilverBow Resources (SBOW - Free Report) , Goodrich Petroleum , Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report) , while LNG exporter Cheniere Energy (LNG - Free Report) is also primed for growth. SilverBow, Goodrich, Range and Comstock sport a Zacks Rank #1 (Strong Buy), while Cheniere carries a Zacks Rank #2 (Buy).

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

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