The U.S. Energy Department's weekly inventory release showed a marginally smaller-than-expected decrease in natural gas supplies. However, the commodity still gained nearly 4% as weather forecasts indicating cooler temperatures were enough to offset investor concerns about a supply glut.
Early Days of the Winter Heating Season
Stockpiles held in underground storage in the lower 48 states fell by 73 billion cubic feet (Bcf) for the week ended Dec 6, marginally below the guidance (of 74 Bcf fall). The decrease was also lower than last year’s drop of 75 Bcf but came above the five-year (2014-2018) average net shrinkage of 68 Bcf for the reported week.
The fourth withdrawal of the year puts total natural gas stocks at 3.518 trillion cubic feet (Tcf) - 593 Bcf (20.3%) above 2018 levels at this time though supplies remain 14 Bcf (0.4%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged 100.4 Bcf per day, essentially unchanged on a weekly basis as marginally lower dry production was offset by increased shipments from Canada.
Meanwhile, daily consumption rose 2.1% to 111.8 Bcf compared to 109.5 Bcf in the previous week primarily due to stronger demand from the power sector.
Prices Rally Amid Cold Weather Forecasts
Despite the lower-than-projected fall in supplies, natural gas prices – that has fallen by around 20% over the past month or so – rose 8.5 cents (or 3.8%) to $2.328 per MMBtu yesterday. The primary contributor to this upward pressure has been predictions of a bout of chilly temperature during the next few days that calls for the heating fuels’ higher consumption, at least for the short term.
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.
Brace for a Wild Ride on the Up and the Downside
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 $2.3 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 more than three-year lows in August.
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.
If you are still looking for near-term natural gas play, CNX Resources Corporation (CNX - Free Report) might be a good selection. The Canonsburg, PA-based company – with a Zacks Rank #2 (Buy) – has seen the Zacks Consensus Estimate for 2019 rise 15.4% over 60 days.
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