The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. However, the injection was higher than the five-year average and the year-ago rise. Therefore, despite a slight recovery, natural gas prices remained close to the lowest levels in three years because of growing fears that soaring production is outpacing demand growth.
Analysis: Less-Than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 102 billion cubic feet (Bcf) for the week ended Jun 7, below the guidance (of 108 Bcf gain) as per the analysts surveyed by S&P Global Platts. However, the increase was higher than the five-year (2014-2018) average net injection of 92 Bcf and last year’s increase of 95 Bcf for the reported week.
The latest rise in inventories puts total natural gas stocks at 2.088 trillion cubic feet (Tcf) to 189 Bcf (10%) above 2018 levels at this time but 230 Bcf (9.9%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged around 93.8 Bcf per day, essentially unchanged on a weekly basis as dry production remained flat. Meanwhile, daily consumption edged up 1% to 82 Bcf primarily due to strong power sector demand.
Natural Gas Slightly Up But Close to Multi-Year Lows
The smaller-than-expected climb in U.S. supplies drove a 2.1% weekly gain for natural gas, erasing some of the steep losses that have taken the commodity to lows not seen since June 2016. Still, natural gas – at $2.387 per MMBtu – is far off the $3.722 per MMBtu 2019-high reached in January. Last week, the fuel hit a fresh three-year low of $2.305.
Can it Rebound?
The fundamentals of natural gas consumption continue to be favorable. The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities have meant that exports out of the U.S. are set for a quantum leap. Finally, higher consumption from industrial projects will likely ensure strong natural gas demand.
However, record high production in the United States and expectations for explosive growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements. Also, with the traditional withdrawal season (when supplies fall on heating demand due to cold weather) having ended in March and predictions for a cooler early summer, consumption is likely to decline in the near term.
Natural gas prices might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment.
Still Fancy a Gas-Weighted Producer?
The uncertain natural gas fundamentals (considering its seasonal nature) is responsible for the understandable reluctance on investors’ part to dip their feet into these stocks.
Moreover, most natural gas-heavy upstream companies like Gulfport Energy Corporation (GPOR - Free Report) , Antero Resources (AR - Free Report) , Cabot Oil & Gas Corporation (COG - Free Report) , SilverBow Resources, Inc. (SBOW - Free Report) , Southwestern Energy Company (SWN - Free Report) etc. carry a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them. Some like Chesapeake Energy Corporation (CHK - Free Report) are further down the pecking order, with Zacks Rank #4 (Sell).
If you are looking for near-term natural gas play, Montage Resources Corporation (MR - Free Report) might be an excellent selection. The company has a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Over 30 days, the Irving, TX-based company has seen the Zacks Consensus Estimate for 2019 earnings per share increase 26.1% to $2.66.
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