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Natural Gas: Price Falls But Fundamentals Remain Bullish

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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 positive inventory numbers, a bearish turn in weather forecasts sparked a pullback in the commodity. But relatively 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 Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 81 billion cubic feet (Bcf) for the week ended Oct 8 compared to the 89 Bcf addition guidance, per the analysts surveyed by S&P Global Platts. But the increase was above the five-year (2016-2020) average net build of 79 Bcf and last year’s addition of 50 Bcf for the same corresponding week.

The latest injection puts total natural gas stocks at 3,369 billion cubic feet (Bcf), which is 501 Bcf (12.9%) below the 2020 level at this time and 174 Bcf (4.9%) lower than the five-year average.

The total supply of natural gas averaged 97.8 Bcf per day, essentially unchanged on a weekly basis as higher dry production was offset by lower shipments from Canada.

Meanwhile, daily consumption rose 1.3% to 84.7 Bcf from 83.6 Bcf in the previous week, primarily due to stronger demand from the residential/commercial sector and increased LNG deliveries, partly canceled by a lower power burn.

Natural Gas Registers a Weekly Decline

Natural gas prices trended downward last week despite the lower-than-expected inventory build. Futures for November delivery ended Friday at $5.41 on the New York Mercantile Exchange, falling 2.8% from the previous week’s closing. The decrease in natural gas realization is the result of a mild weather outlook and the subsequent lull in heating/cooling demand.

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 moderate temperature-driven consumption, after which prices have gone down. 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 earlier this month. As a matter of fact, prices have more than doubled year to date and a staggering 270% 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 (GDP - Free Report) , Range Resources (RRC - Free Report) , Comstock Resources (CRK - Free Report) , EQT Corporation (EQT - Free Report) and CNX Resources (CNX - 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 EQT, CNX and Cheniere carry a Zacks Rank #2 (Buy).

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

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