The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. Notwithstanding the positive inventory numbers, futures settled with a fifth consecutive loss week over week, overwhelmed by high production and predictions of insipid weather-related 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 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 Withdrawal Bigger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 117 billion cubic feet (Bcf) for the week ended Dec 1, above the guidance of a 105 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The decrease was also significantly more than the five-year (2018-2022) average net shrinkage of 48 Bcf and last year’s decline of 30 Bcf for the reported week.

The latest draw puts total natural gas stocks at 3,719 Bcf, which is 254 Bcf (7.3%) above the 2022 level and 234 Bcf (6.7%) higher than the five-year average.

The total supply of natural gas averaged 110.7 Bcf per day, down 0.6 Bcf per day on a weekly basis due to lower shipments from Canada and a slight decrease in dry production.

Meanwhile, daily consumption fell to 118.1 Bcf from 127.5 Bcf in the previous week, mainly reflecting a drop in residential/commercial usage as well as lower power burn.

Natural Gas Prices Still Finish Lower

Natural gas prices trended downward last week despite the higher-than-expected inventory decrease. Futures for January delivery — which slumped to a three-and-a-half-month low earlier in the week — ended Friday at $2.581 on the New York Mercantile Exchange, retreating some 8.3% from the previous week’s closing. The decrease in natural gas realization is 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. It 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 22% 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 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 hold 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 $7.2 billion, RRC has gained 11.9% 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 $18.6 billion, CTRA has edged down 0.6% 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 602.3% 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 8.4% in a year.