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Natural Gas Loses 6% for the Week: What's Behind the Drop?

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The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The bearish injection, which was also higher than the five-year average, sparked a sell-off that left the U.S. benchmark with a loss of nearly 6% for the week.

A Triple-Digit Injection

Stockpiles held in underground storage in the lower 48 states rose by 102 billion cubic feet (Bcf) for the week ended Sep 20, above the guidance (of 93 Bcf gain). The increase was higher than the five-year (2014-2018) average net injection of 74 Bcf and last year’s addition of 51 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 3.205 trillion cubic feet (Tcf) - 444 Bcf (16.1%) above 2018 levels at this time but 47 Bcf (1.4%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged 97.5 Bcf per day, up 0.6% on a weekly basis as dry production inched up to 93.1 Bcf per day from 92.2 Bcf per day. Meanwhile, 7% less gas flowed into the country from Canada.

On the other hand, daily consumption was down 2.2% to 81.3 Bcf compared to 83.1 Bcf in the previous week primarily due to lower power sector demand driven by mild temperatures in the Northeast U.S. This was partly offset by increased deliveries to LNG export terminals and higher residential consumption.

Futures Move Lower

The natural gas futures market slumped following the bigger-than-expected climb in U.S. supplies, with the commodity posting a 5.9% weekly loss and erasing most of the steep gains over the past few weeks associated with warmer weather and higher cooling demand. Futures for November delivery also fell after weather updates showed forecasts of mild temperatures in a number of regions of the Lower 48 U.S. states that would hamper the demand for natural gas this upcoming winter heating season.

Strong Supply Growth to Outpace Increase in Demand

The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 37%, 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 healthy growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements.

Investors Should Wait for a Better Time to Build a Position

Natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. With gas output in the lower 48 states recently hitting a record 92.8 Bcf per day, there is little room for prices to improve meaningfully from their current levels of around $2.4 per MMBtu.

The bearish natural gas fundamentals and its seasonal nature is responsible for the understandable reluctance on investors’ part to dip their feet into these stocks. In fact, the commodity fell to lows not seen since May 2016 last month.

Moreover, most natural gas-heavy upstream companies like EQT Corporation (EQT - Free Report) , SilverBow Resources, Inc. (SBOW - Free Report) , Cabot Oil & Gas Corporation (COG - Free Report) , Montage Resources Corporation (MR - Free Report) , Gulfport Energy Corporation (GPOR - 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.

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

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