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 February, weighed on natural gas futures, which settled with a slight loss week over week, despite a significant bump, following Chesapeake Energy’s (CHK Quick QuoteCHK - Free Report) planned production cut for 2024.

In fact, the market hasn't been kind to natural gas, with the commodity recently hitting fresh three-and-a-half-year lows 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 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 60 billion cubic feet (Bcf) for the week ended Feb 16, below the guidance of a 65 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The decrease compared with the five-year (2019-2023) average net shrinkage of 168 Bcf and last year’s decline of 75 Bcf for the reported week.

The latest draw puts total natural gas stocks at 2,470 Bcf, which is 265 Bcf (12%) above the 2023 level and 451 Bcf (22.3%) higher than the five-year average.

The total supply of natural gas averaged 109.5 Bcf per day, down 0.4 Bcf per day on a weekly basis due to a slump in dry production, partly offset by higher shipments from Canada.

Meanwhile, daily consumption jumped to 124.5 Bcf from 116.4 Bcf in the previous week, mainly reflecting strength in residential/commercial usage and a higher power burn triggered by a widespread decline in temperatures.

Natural Gas Prices Finish Essentially Flat

Natural gas prices barely budged last week following the lower-than-expected inventory decrease. Futures for March delivery ended Friday at $1.609 on the New York Mercantile Exchange, edging down some 0.4% from the previous week’s closing.

Investors should know that natural gas realization has been under pressure from strong production, an elevated level of stockpiles and tepid weather-related demand. The bearish sentiment surrounding the commodity even prompted shale producer Chesapeake Energy to announce a reduction in its drilling rigs so as to lower volume. The company decided to cut this year’s gas production expectations by around 20%. CHK’s plans rippled through the market, with natural gas surging 12.5% on Wednesday for its biggest one-day percentage gain since July 2022.

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With a mil winter so far and forecasts turning warmer, usage of the commodity to generate electricity has taken a hit. It's worth mentioning that natural gas has been under pressure from record domestic 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 U.S. production. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down more than 20% 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. As a matter of fact, 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 it is, 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 Coterra Energy and Cheniere Energy.

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 (Hold) company churned out an average of 2,262.7 million cubic feet on a daily basis from these assets in 2023.

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

Coterra beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 9.3%. Valued at around $19.5 billion, CTRA has risen 2.4% 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’s expected EPS growth rate for three to five years is currently 25.8%, which compares favorably with the industry's growth rate of 21.2%. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 64.7%, on average. LNG shares have gone down 0.5% in a year.