The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The negative inventory numbers, coupled with other factors, meant that futures fell for the seventh week in a row.

At the same time, there appears to be plenty of upside left for the commodity in 2022, supported by a strong liquefied natural gas (“LNG”) export trend and solid fundamentals. In this context, it would be wise to build a position in quality names such as Chesapeake Energy (CHK Quick QuoteCHK - Free Report) , EQT Corporation (EQT Quick QuoteEQT - Free Report) and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Build Larger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 129 billion cubic feet (Bcf) for the week ended Sep 30, exceeding the guidance of a 114 Bcf addition per the analysts surveyed by S&P Global Commodity Insights.

The increase was also above last year’s injection of 114 Bcf for the same corresponding week and the five-year (2017-2021) average net build of 87 Bcf.

The latest increment puts total natural gas stocks at 3,106 Bcf, which is still 165 Bcf (5%) below the 2021 level at this time and 264 Bcf (7.8%) lower than the five-year average.

The total supply of natural gas averaged 106.5 Bcf per day, up 0.8 Bcf per day on a weekly basis as dry production jumped to a new record of 100.3 Bcf per day.

Meanwhile, daily consumption fell 1.4% to 89.7 Bcf from 91 Bcf in the previous week, mainly reflecting a weaker power burn, with the cooling demand season coming to a finish.

Natural Gas Registers a Marginal Weekly Decrease

Natural gas prices edged down last week, following the higher-than-expected inventory build. Futures for November delivery ended Friday at $6.748 on the New York Mercantile Exchange, falling around 0.3% from the previous week’s closing. The decrease in natural gas realization — for the seventh straight week — is also the result of a boom in supplies and the prediction of mild autumn weather.

Final Thoughts

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models anticipate light temperature-driven consumption over the near term (with little use of air conditioning or heater across much of the Lower 48), which is a negative for prices.

An increase in natural gas production has also kept the commodity in check. With the upstream operators finally responding to price incentives and ramping up volumes in the last two months, daily production has topped 100 Bcf in recent weeks. This wave of new supply is expected to largely neutralize concerns that the market might enter the winter withdrawal season with gas in storage well below normal. Current inventories are still low and remain nearly 8% below their five-year average.

The one thing supporting natural gas is a stable demand catalyst in the form of continued strong LNG feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere. Now, with the Russia-Ukraine conflict, LNG has become even more coveted. As a matter of fact, earlier this year, the United States entered into a partnership with the EU to export additional LNG to wean the bloc off its dependence on Russian natural gas supplies. This means LNG deliveries are poised to rise further, especially with natural gas supplies from Moscow to Europe squeezed following leaks in the key Nord Stream pipeline.

However, the protracted downtime associated with the fire breakout at the Freeport LNG export plant in Texas has drowned out most of the positives as of now. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — was knocked offline by the Jun 8 blast and is expected to only partially restart in November. Consequently, some of the LNG cargoes due for export are likely to have been diverted to the domestic market despite huge demand abroad. 

Investing Strategy

While fundamental indicators continue to suggest strong price levels, the natural gas market is currently quite unpredictable and spooked by the sudden rise in production and mild weather. As such, investors are rather unsure of what to do. As of now, the lingering uncertainty over the fuel means that they should preferably opt for fundamentally strong stocks like Chesapeake Energy, EQT and Cheniere Energy.  

Chesapeake Energy has a premier natural gas portfolio with more than 15 years of inventory spread over some 2,200 locations. CHK — valued at some $12.1 billion — has a projected earnings growth rate of 95.4% for the current quarter.   

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. This Zacks Rank #1 (Strong Buy) stock has a trailing four-quarter earnings surprise of 24.5%, on average. CHK shares have rallied 60.2% in a year.

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

EQT: EQT is primarily an explorer and producer of natural gas, with a primary focus on the Appalachian Basin in Ohio, Pennsylvania and West Virginia. In terms of average daily sales volumes, EQT is the largest natural gas producer in the domestic market.

The company, carrying a Zacks Rank #2 (Buy), has an expected earnings growth rate of 369.6% for the current year. The Zacks Consensus Estimate for EQT’s 2022 earnings has been revised 14% upward over the past 60 days. EQT — valued at around $16 billion — has soared 117% in a year.

Cheniere Energy is valued at around $43.5 billion. LNG reported EPS of $2.90 for the second quarter, reflecting a 2.5% surprise over consensus.

Cheniere Energy has a projected earnings growth rate of 235.7% for the current year. The Zacks Consensus Estimate for this #2 Ranked natural gas exporter’s third-quarter earnings has been revised 42.7% upward over the past 60 days. LNG shares have climbed 71.2% in a year.