The U.S. Energy Department's weekly inventory release showed that natural gas supplies decreased largely as expected. The neutral inventory numbers notwithstanding, futures settled with a loss week over week, overwhelmed by excessive supply and insipid weather-related demand.

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 worries about record output and concerns about a growing 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 Essentially In-Line Withdrawal

Stockpiles held in underground storage in the lower 48 states fell 40 billion cubic feet (Bcf) for the week ended Mar 1, almost matching the guidance of a 41 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 93 Bcf and last year’s decline of 72 Bcf for the reported week.

The latest draw puts total natural gas stocks at 2,334 Bcf, which is 280 Bcf (13.6%) above the 2023 level and 551 Bcf (30.9%) higher than the five-year average.

The total supply of natural gas averaged 105.8 Bcf per day, down 2 Bcf per day on a weekly basis due to a slump in dry production and lower shipments from Canada.

Meanwhile, daily consumption fell to 108.4 Bcf from 111.3 Bcf in the previous week, mainly reflecting weakness in residential/commercial usage and a lower power burn triggered by an increase in temperatures in the Northeast and Atlantic Coast.

Natural Gas Prices Finish Lower

Natural gas prices fell last week against the as-expected inventory decrease backdrop. Futures for April delivery ended Friday at $1.81 on the New York Mercantile Exchange, down some 1.6% 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. It's worth mentioning that the current inventory levels are well above the year-ago figure and the five-year average. The bearish sentiment surrounding the commodity even prompted shale producers Chesapeake Energy (CHK Quick QuoteCHK - Free Report) and EQT Corporation (EQT Quick QuoteEQT - Free Report) to hit the breaks on new drilling.

CHK announced 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%. Chesapeake’s plans rippled through the market, with Appalachian Basin-focused EQT following on. The explorer and producer of natural gas said that it will lower its daily output by 1 Bcf to combat the supply glut in the U.S. market. According to EQT, the revised plan took effect in late February and will continue at least through March. This will likely reduce net production by 30-40 Bcf, per the company. While these production cut announcements temporarily sent natural gas prices higher, they have failed to galvanize the market.

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With a mild winter so far and forecasts turning warmer, usage of the commodity to generate electricity has taken a hit.

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 nearly 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. 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, with prices tumbling more than 40%, briefly breaking below the $2 threshold for the first time since 2020. Now, it has again tumbled below that psychological mark.

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 $19.9 billion, CTRA has risen 7.7% 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 21.7%. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 64.7%, on average. LNG shares have edged up 0.6% in a year.