The U.S. Energy Department's weekly inventory release showed a bigger-than-expected increase in natural gas supplies. Despite the stockpile surge, natural gas prices rallied to their highest levels since January as inventories remain significantly below their five-year average ahead of the upcoming winter.
Analysis of the Data: Larger-than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 98 billion cubic feet (Bcf) for the week ended Sep 28, above the guidance (of 85 Bcf gain) as per the analysts surveyed by S&P Global Platts. The injection was also higher than both the five-year (2013-2017) average addition of 84 Bcf and last year’s build of 44 Bcf for the reported week.
Despite past week’s larger-than-anticipated supply addition, the current storage remains well below benchmarks. At 2.866 trillion cubic feet (Tcf), natural gas inventories are 607 Bcf (17.5%) under the five-year average and 636 Bcf (18.2%) below the year-ago figure.
Fundamentally speaking, total supply of natural gas averaged around 89.3 Bcf per day, essentially unchanged on a weekly basis. Meanwhile, daily consumption edged down 0.7% to 75.5 Bcf on weaker power generation demand, partly offset by higher natural gas usage for residential and commercial requirements.
Prices Surge, Supply Curb Uncertainty Offsets Bearish EIA Report
Despite the headline miss, natural gas prices gained 4.5% last week to settle at $3.143 per MMBtu on Friday, after reaching an eight-month high of $3.26 a barrel earlier in the week. The fossil fuel’s climb, despite skyrocketing production, could be traced to the substantial deficit in natural gas stockpiles ahead of the upcoming winter season. Following a colder-than-expected April and hot summer, natural gas inventory levels are at their lowest since 2003.
Positive Long-Term Thesis
The fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.
The EIA predicts global demand for the commodity to grow 43% from 2015 to 2040. Countries in Asia and in the Middle East – led by China’s transition away from coal – will account for most of this increase. The replacement of coal-fired power plants and higher consumption from industrial projects have also contributed to the strength in natural gas demand.
Finally, if the upcoming (2018-2019) winter turns out to be colder-than-normal, the surge in expected demand in the face of relative deficit of natural gas inventory could trigger a large rally in the commodity's price.
Want to Own a Natural Gas Stock Now?
The secular tailwinds mentioned above could see natural gas eventually settle well above the $3 per MMBtu mark before the end of the winter. This augurs well for natural gas-heavy upstream companies like Cabot Oil & Gas Corp. (COG - Free Report) , Chesapeake Energy Corp. (CHK - Free Report) , Comstock Resources, Inc. (CRK - Free Report) , Eclipse Resources Corp. (ECR - Free Report) , Gulfport Energy Corp. (GPOR - Free Report) and Southwestern Energy Company (SWN - Free Report) . However, each of these firms has a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.
Meanwhile, if you are looking for a near term natural gas play, CNX Resources Corporation (CNX - Free Report) may be a good selection. This company has a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CNX Resources is a natural gas-focused exploration and production company with primary focus on the Marcellus and Utica Shales of the Appalachian Basin. More than 90% of CNX Resources’ production is comprised of natural gas. The Zacks Consensus Estimate for its current year earnings rose 7.2% in the last 60 days.
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