The U.S. Energy Department's weekly inventory release showed a smaller-than-expected decrease in natural gas supplies. The negative inventory numbers, coupled with other factors, meant that futures fell week over week.  

In fact, the market hasn't been kind to natural gas in 2023, with the commodity trading considerably lower year to date and briefly breaking below the $2 threshold last week for the first time since 2020.

While macro challenges are leading to some concerns, we advise investors to focus on stocks like SilverBow Resources (SBOW Quick QuoteSBOW - Free Report) and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Withdrawal Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 47 billion cubic feet (Bcf) for the week ended Mar 24, below the guidance of 56 Bcf decline per a survey conducted by The Wall Street Journal.

However, the decrease was higher than last year’s pull of 15 Bcf for the same corresponding week and the five-year (2018-2022) average net shrinkage of 17 Bcf.

The latest draw of the winter heating season puts total natural gas stocks at 1,853 Bcf, which is 442 Bcf (31.3%) above the 2022 level at this time and 321 Bcf (21%) higher than the five-year average.

The total supply of natural gas averaged 104.9 Bcf per day, down 0.8 Bcf per day on a weekly basis due to a decrease in shipments from Canada.

Meanwhile, daily consumption deteriorated 6% to 104.5 Bcf from 111.2 Bcf in the previous week, mainly reflecting lower residential/commercial demand.

Natural Gas Drops Further

Natural gas prices trended downward last week, following the lower-than-expected inventory draw. Futures for May delivery ended Friday at $2.216 on the New York Mercantile Exchange, falling around 6.1% from the previous week’s closing. The decrease in natural gas realization is also the result of forecasts for warmer weather and plentiful supply.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With the latest models anticipating tepid temperature-driven consumption in the near term (with less use of heaters across homes and businesses), prices are likely to be impacted adversely. Compounding the matter, daily production has hovered around the record 100 Bcf mark due to a relatively mild winter, and this has pushed stocks significantly above historical levels.

However, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is also supporting natural gas. LNG shipments for export from the United States have been elevated 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, last 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 that LNG deliveries are poised to remain robust, especially with squeezed natural gas supplies from Moscow to Europe, following a shutdown in the Nord Stream pipeline from last August.

Meanwhile, the protracted downtime associated with the fire breakout at the Freeport LNG export plant in Texas has drowned out some of the positives as of now. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — was knocked offline by a blast in June last year and has only partially restarted after several missed target dates. Consequently, some of the LNG cargoes due for export are likely to have been diverted to the domestic market despite huge demand abroad. 

Final Thoughts

Based on several factors, the natural gas market is down more than 50% so far this year. As a matter of fact, the space is currently quite unpredictable and spooked by the sudden changes in 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 holding on to fundamentally strong stocks like Cheniere Energy and SilverBow Resources (SBOW Quick QuoteSBOW - Free Report) .

SilverBow Resources: SilverBow has operations across roughly 130,000 net acres in the Eagle Ford, and more than 80% of its total output comprises natural gas. The Zacks Rank #3 (Hold) company’s exposure to premium markets and focus on costs and margins should help it to benefit from any increase in natural gas prices.

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

SilverBow beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 80.8%. Valued at around $513.5 million, SBOW has lost 33.7% in a year.

Cheniere Energy: Being the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy certainly enjoys a distinct competitive advantage.

Cheniere Energy has a projected earnings growth rate of 187.6% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 8.7% upward over the past 60 days. LNG shares have gained 11.4% in a year.

At the same time, investors might want to sell some bottom-ranked stocks like Comstock Resources (CRK Quick QuoteCRK - Free Report) .  

Comstock Resources: CRK is a leading operator in the Haynesville shale — a premier natural gas basin — with 323,000 net acres. About 98% of the company’s total output is natural gas.

Comstock Resources has a projected earnings growth rate of -50.1% for the current year. Valued at around $3 billion, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 45.1% downward over the past 60 days. CRK shares have lost 20.6% this year.