The U.S. Energy Department's weekly inventory release showed a lower-than-expected decrease in natural gas supplies. The bearish inventory numbers, together with predictions of weaker weather-related demand in late January, weighed on natural gas futures, which settled with a heavy loss week over week.

In fact, the market hasn't been kind to natural gas, with the commodity trading considerably lower over the past 12 months due to growing worries about record output and concerns about an ongoing supply glut. 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 Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 154 billion cubic feet (Bcf) for the week ended Jan 12, below the analyst guidance of some 165 Bcf withdrawal. The decrease compared with the five-year (2019-2023) average net shrinkage of 126 Bcf and last year’s decline of 68 Bcf for the reported week.

The latest draw puts total natural gas stocks at 3,182 Bcf, which is 350 Bcf (12.4%) above the 2023 level and 320 Bcf (11.2%) higher than the five-year average.

The total supply of natural gas averaged 103.6 Bcf per day, down 6.8 Bcf per day on a weekly basis due to a slump in dry production, with frigid weather triggering blackouts and causing processing plants to shut down.

Meanwhile, daily consumption jumped to 150.2 Bcf from 131.1 Bcf in the previous week, mainly reflecting strength in residential/commercial usage and higher power burn triggered by widespread, below-average temperatures.

Natural Gas Prices Finish Sharply Lower

Natural gas prices plunged last week following the lower-than-expected inventory decrease. Futures for February delivery ended Friday at $2.52 on the New York Mercantile Exchange, falling some 24% from the previous week’s closing. The drop in natural gas realization is also the result of predictions of warmer-than-normal weather.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts beyond the current cold arctic blast turning warmer (toward the end of January), usage of the commodity to generate electricity is likely to take a hit. It's worth mentioning that natural gas has been 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 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 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. Despite the prevailing deep freeze disrupting some scheduled departures, 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

The upshot of all of these factors — the natural gas market — remains an oversupplied one. As a matter of fact, it endured a torrid year in 2023, as prices tumbled more than 40%, briefly breaking below the $2 threshold for the first time since 2020.

Based on several factors, the space is currently quite unpredictable and spooked by 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 10.5% 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 $18.3 billion, CTRA has fallen 5.4% 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 enjoys a distinct competitive advantage.

Cheniere Energy has a projected earnings growth rate of 602.8% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 17.2% upward over the past 90 days. LNG shares have gone up 4% in a year.