The U.S. Energy Department's weekly inventory release showed an increase in natural gas supplies that defied analyst expectations for a seasonal draw. The bearish inventory numbers, together with high production and predictions of insipid weather-related demand, dragged down natural gas futures, which settled with a fourth consecutive loss 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 for the first time since 2020. At this time, we advise investors to focus on stocks like Range Resources (RRC Quick QuoteRRC - Free Report) , Coterra Energy (CTRA Quick QuoteCTRA - Free Report) and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Surprise Climb

Stockpiles held in underground storage in the lower 48 states rose 10 billion cubic feet (Bcf) for the week ended Nov 24, in contrast to the guidance of a 10 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The increase compared with the five-year (2018-2022) average net shrinkage of 44 Bcf and last year’s decline of 80 Bcf for the reported week.

The unexpected build put total natural gas stocks at 3,836 Bcf, which is 341 Bcf (9.8%) above the 2022 level and 303 Bcf (8.6%) higher than the five-year average.

The total supply of natural gas averaged 111.9 Bcf per day, up 1.1 Bcf per day on a weekly basis due to higher shipments from Canada and an increase in dry production.

Meanwhile, daily consumption rose to 128.1 Bcf from 110.1 Bcf in the previous week, mainly reflecting a surge in residential/commercial usage as well as higher power burn and industrial consumption.

Natural Gas Prices Finish Lower

Natural gas prices trended downward last week following the unseasonal inventory increase. Futures for January delivery ended Friday at $2.81 on the New York Mercantile Exchange, retreating some 6.2% from the previous week’s closing. The decrease in natural gas realization is also the result of high supply and mild weather.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With mild weather across major parts of the United States and forecasts for above-normal temperature in the longer term, usage of the commodity to generate electricity is expected to be tepid.

As it is, natural gas is under pressure from near-record output, with current inventory levels well above the year-ago figure and the five-year average. The full restart of the Freeport LNG export plant in Texas is also likely to contribute significantly toward the global supply picture. 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 been functioning only partially since its resumption in February.  

Having said all of that, there are signs of curtailment in domestic output. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down some 25% from last year. 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. LNG shipments for export from the United States have been elevated for months, recently reaching record levels due to environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies due to the war in Ukraine. 

Final Thoughts

Following last week’s decrease, the natural gas market is down more than 37% 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 Range Resources, Coterra Energy and Cheniere Energy.

Range Resources: RRC is a leading operator in the prolific Appalachian Basin — a premier natural gas play — with huge inventories of low-risk drilling sites that are likely to provide production for several decades. About 68% of the Zacks #3 Rank (Hold) company’s total output is natural gas.

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

Range Resources beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, with the average being 33.6%. Valued at around $7.9 billion, RRC has gained 29.8% in a year.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. The Zacks Rank #3 company churned out an average of 2,204 million cubic feet on a daily basis from these assets in 2022.

Coterra beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 11.8%. Valued at around $19.7 billion, CTRA has edged down 0.2% 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 602.5% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 17.3% upward over the past 60 days. LNG shares have gone up 5.4% in a year.