The U.S. Energy Department's weekly inventory release showed that natural gas supplies decreased as expected. The neutral inventory numbers notwithstanding, futures settled with a sixth consecutive loss week over week, overwhelmed by high production and 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 an In-Line Withdrawal

Stockpiles held in underground storage in the lower 48 states fell 55 billion cubic feet (Bcf) for the week ended Dec 8, tallying with the guidance of a survey conducted by S&P Global Commodity Insights. The decrease compared with the five-year (2018-2022) average net shrinkage of 81 Bcf and last year’s decline of 46 Bcf for the reported week.

The latest draw puts total natural gas stocks at 3,664 Bcf, which is 245 Bcf (7.2%) above the 2022 level and 260 Bcf (7.6%) higher than the five-year average.

The total supply of natural gas averaged 110.4 Bcf per day, down 0.3 Bcf per day on a weekly basis due to lower shipments from Canada, partly offset by a slight increase in dry production.

Meanwhile, daily consumption rose to 122.5 Bcf from 118.1 Bcf in the previous week, mainly reflecting strength in residential/commercial usage and higher power burn, to go with a pickup in deliveries to LNG export terminals.

Natural Gas Prices Finish Lower

Natural gas prices trended downward last week following the expected inventory decrease. Futures for January delivery — which slumped to a six-month low earlier in the week — ended Friday at $2.49 on the New York Mercantile Exchange, retreating some 3.5% 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 during the early part of winter and forecasts of above-normal temperatures into the end of the year, usage of the commodity to generate electricity has taken a hit. In addition to this, natural gas is also under pressure from near-record output, with current inventory levels well above the year-ago figure and the five-year average.  

Having said that, there are signs of curtailment in domestic volumes. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down some 23% 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, 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 44% 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 12.7% 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 $18.9 billion, CTRA has edged up 1.6% 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% in a year.