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What Triggered the Fall in Natural Gas Prices Last Week?

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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 dropped nearly 6% week over week, overwhelmed by predictions of slackening 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. At this time, 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 33 billion cubic feet (Bcf) for the week ended Sep 1, below the guidance of a 41 Bcf addition per a survey conducted by S&P Global Commodity Insights. The build compared with the five-year (2018-2022) average net injection of 60 Bcf and last year’s growth of 55 Bcf for the reported week.

The latest increase puts total natural gas stocks at 3,148 Bcf, which is 462 Bcf (17.2%) above the 2022 level at this time and 222 Bcf (7.6%) higher than the five-year average.

The total supply of natural gas averaged 107.9 Bcf per day, down 0.6 Bcf per day on a weekly basis due to a decrease in dry production and lower shipments from Canada.

Meanwhile, daily consumption fell 2.2% to 98.7 Bcf from 100.9 Bcf the previous week, mainly reflecting lower power burn, partly offset by a pickup in deliveries to LNG export terminals.

Natural Gas Prices Still Post A Loss

Natural gas prices trended downward last week despite the lower-than-expected inventory build. Futures for October delivery ended Friday at $2.61 on the New York Mercantile Exchange, falling 5.8% from the previous week’s closing. The decrease in natural gas realization is the result of unfavorable 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 moderating heat in the days ahead, usage of the commodity to generate electricity to meet cooling demand is expected to be tepid.

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 January 2022. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. While falling from their April highs, 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 drop, the natural gas market is down 42% so far this year. Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production patterns. As such, investors are clueless about 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 23.7%. Valued at around $11.8 billion, CHK has lost 13.9% 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 487.1% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 7.3% upward over the past 60 days. LNG shares have edged up 0.9% in a year.

At the same time, investors might want to sell some bottom-ranked stocks like Gulfport Energy Corporation (GPOR - Free Report) .  

Gulfport Energy: GPOR has operations across more than 250,000 net acres in the Appalachia and Anadarko basins, and more than 90% of its total output comprises natural gas.

Gulfport Energy has a projected earnings growth rate of (24.9%) for the current year. Valued at $2.3 billion, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 6.3% downward over the past 60 days. GPOR shares have gained 25.4% in a year.

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