Back to top

Image: Bigstock

Natural Gas Sees Weekly Gain on EIA Report, Summer Forecasts

Read MoreHide Full Article

The U.S. Energy Department's weekly inventory release showed that natural gas supplies increased less than expected. The positive inventory numbers, together with signs of production pullback and upcoming summer demand, buoyed natural gas futures, which settled with a healthy gain week over week.

Despite this spike, which saw natural gas hit its highest since January, the market hasn't been kind to the commodity. It fell to multi-year lows earlier this year due to worries about record output and concerns about a growing glut magnified by a mild winter. 

At this time, we advise investors to focus on stocks like Coterra Energy (CTRA - Free Report) and Cheniere Energy (LNG - Free Report) .

EIA Reports a Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 79 billion cubic feet (Bcf) for the week ended May 3, below the guidance of an 84 Bcf addition, per a survey conducted by S&P Global Commodity Insights. The increase compared with the five-year (2019-2023) average net injection of 81 Bcf and last year’s growth of 71 Bcf for the reported week.

The latest increase puts total natural gas stocks at 2,563 Bcf, which is 444 Bcf (21%) above the 2023 level and 640 Bcf (33.3%) higher than the five-year average.

The total supply of natural gas averaged 104.3 Bcf per day, up 0.2 Bcf per day on a weekly basis due to higher shipments from Canada. 

Meanwhile, daily consumption inched down to 95.2 Bcf from 95.8 Bcf in the previous week, mainly reflecting a drop in residential/commercial usage that was partly offset by higher natural gas consumed for power generation.

Natural Gas Prices Finish Higher

Natural gas prices trended northward last week following the lower-than-expected inventory build. Futures for June delivery ended Friday at $2.25 on the New York Mercantile Exchange, up some 5.1% from the previous week’s closing. Nevertheless, the fuel has declined more than 10% this year after tumbling 44% in 2023.

Investors should know that natural gas realization has been under pressure from strong production, elevated 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 - Free Report) and EQT Corporation (EQT - Free Report) to hit the brakes on new drilling.

Chesapeake announced a reduction in its drilling rigs so as to lower volume, with the Appalachian Basin-focused EQT following on. CHK has decided to curb second quarter’s gas production expectations by 400 million cubic feet per day (MMcf/d), doubling the previous curtailment announced in March. Separately, EQT — the largest domestic producer of natural gas — said that it will lower its daily output by 1 Bcf through May to combat the supply glut in the U.S. market. According to EQT, the revised plan will likely reduce full-year sales volume to 2,100-2,200 billion cubic feet equivalent (Bcfe), compared with 2,200-2,300 Bcfe earlier. While these production cut announcements temporarily drove natural gas prices higher, they have failed to sustain these gains and galvanize the market. 

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With low heating demand this winter, usage of the commodity to generate electricity has taken a hit. However, predictions of warmer-than-normal weather over most of the United States should boost demand. 

Moreover, 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 around 27% 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 of late, 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. At the same time, the increase in gas flows due to the recent restart of a Freeport LNG liquefaction train in Texas has translated into more of the commodity being loaded onto ships. A heatwave blanketing Southeast Asia has also led to a jump in power demand for air conditioning, increasing exports of the super-chilled fuel.

Final Thoughts

The upshot of all these factors — the natural gas market — remains an oversupplied one. As mentioned above, it endured a torrid year in 2023, briefly breaking below the $2 threshold for the first time since 2020. The situation is not much different in 2024, with the fuel reaching a multi-year low near $1.48 in late March and struggling to sustain a rally over the psychological mark of $2.  

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. This 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 9.8%. Valued at around $20.9 billion, CTRA has risen 6.2% 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 beat the Zacks Consensus Estimate for earnings in two of the last four quarters and missed in the other two. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 58.9%, on average. LNG shares have moved up 13.2% in a year.

Published in