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What the EIA Inventory Numbers Say About Natural Gas Stocks

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The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. However, the positive sentiment was overwhelmed by the lack of meaningful demand amid strong production, which led prices to trickle down.

Storage Number Beat Estimates but Fell Short of the 5-Year Average

Stockpiles held in underground storage in the lower 48 states fell by 107 billion cubic feet (Bcf) for the week ended Dec 13, above the guidance (of 93 Bcf fall). However, the decrease was lower than the five-year (2014-2018) average net shrinkage of 112 Bcf and last year’s drop of 132 Bcf for the reported week.

The fifth withdrawal of the year puts total natural gas stocks at 3.411 trillion cubic feet (Tcf) - 618 Bcf (22.1%) above 2018 levels at this time though supplies remain 9 Bcf (0.3%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged 100.6 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 5.6% to 118 Bcf compared to 111.7 Bcf in the previous week primarily due to stronger demand from the power and residential/commercial sectors.

Prices Fall Back Despite Higher-Than-Expected Drawdown

Natural gas prices edged down 1.3 cents (or 0.6%) to $2.273 per MMBtu yesterday despite a government report that beat estimates to the upside. The marginal decline could be attributed to projections of warmer-than-usual temperatures during the next few days that calls for the heating fuels’ lower consumption, at least for the short term.

Record Output to Offset Rising 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.

Expect Price Volatility on Weather and Storage Levels

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 , Montage Resources Corporation , 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 19% over 60 days.

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