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Natural Gas Prices Tick Down 16% as Demand Worries Linger

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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, futures slumped nearly 16% week over week, overwhelmed by expectations for comfortable temperatures and, therefore, lighter heating or cooling demand.

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 for the first time since 2020.

As tepid weather-related usage continues to impact the commodity’s consumption, we advise investors to focus on stocks like Chesapeake Energy (CHK - Free Report) and Cheniere Energy (LNG - Free Report) .

EIA Reports a Build Smaller Than Anticipated

Stockpiles held in underground storage in the lower 48 states rose 96 billion cubic feet (Bcf) for the week ended May 19, below the guidance of 101 Bcf addition per a survey conducted by S&P Global Commodity Insights. The increase compared with the five-year (2018-2022) average net injection of 96 Bcf and last year’s growth of 88 Bcf for the reported week.

The latest build puts total natural gas stocks at 2,336 Bcf, which is 529 Bcf (29.3%) above the 2022 level at this time and 340 Bcf (17%) higher than the five-year average.

The total supply of natural gas averaged 105.4 Bcf per day, up 0.2 Bcf per day on a weekly basis due to an increase in dry production.

Meanwhile, daily consumption deteriorated 1.3% to 88.6 Bcf from 89.8 Bcf in the previous week, mainly reflecting lower power burn, which was partly offset by a higher residential/commercial demand.

Natural Gas Prices Still Post a Big Loss

Natural gas prices trended significantly downward last week despite the smaller-than-expected inventory build. Futures for June delivery ended Friday at $2.18 on the New York Mercantile Exchange, falling 15.6% from the previous week’s closing. The drop in natural gas realization is the result of mild weather predictions, which more than offset signs of curtailment in domestic output.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts for benign weather in the days ahead, demand is expected to be modest.

While natural gas has been pushed lower by bearish weather conditions, a brake in upstream activity continues to restrict the commodity from falling further. According to energy services provider Baker Hughes, U.S. natural gas rig count — a pointer to where production is headed — is now at its lowest since March 2022. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies ahead of the impending summer cooling demand.

Meanwhile, 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 Europe’s endeavor to move away from its dependence on Russian natural gas supplies following the war in Ukraine.

Final Thoughts

Following last week’s plunge, the natural gas market is down more than 50% so far this year. Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production pattern. 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 Chesapeake Energy and Cheniere Energy.

Chesapeake Energy: Chesapeake has a premier portfolio with more than 15 years of inventory spread over some 2,200 locations and around 90% 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.

Chesapeake beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 26.6%. Valued at around $10.4 billion, CHK has lost 24.7% 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 452% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 91.8% upward over the past 30 days. LNG shares have gained 0.4% in a year.

At the same time, investors might want to sell some bottom-ranked stocks like Comstock Resources (CRK - 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 -73.7% for the current year. Valued at $2.7 billion, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 7.5% downward over the past 30 days. CRK shares have lost 53% in a year.

See More Zacks Research for These Tickers

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