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U.S. Natural Gas: Weekly Analysis of the EIA Inventory Data

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The U.S. Energy Department's weekly inventory release showed a smaller-than-expected decrease in natural gas supplies that was also lower than the five-year average and the year-ago decline. Prices rose nevertheless as market participants chose to focus on a bullish weather forecast. But the positive sentiment is unlikely to last and the commodity is expected to give way to pressure from rising production. As it is, following the report, the U.S. moved to a surplus relative to its five-year natural-gas supply average.

A Considerably Smaller Drawdown

Stockpiles held in underground storage in the lower 48 states fell by 44 billion cubic feet (Bcf) for the week ended Jan 3, below the guidance (of 50 Bcf fall). The decrease was also lower than last year’s drop of 81 Bcf and the five-year (2015-2019) average net shrinkage of 156 Bcf for the reported week.

The latest withdrawal puts total natural gas stocks at 3.148 trillion cubic feet (Tcf) - 521 Bcf (19.8%) above 2019 levels at this time and 74 Bcf (2.4%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 100.4 Bcf per day, edging up 0.6% on a weekly basis due to increased shipments from Canada even as dry production remained essentially unchanged.

Meanwhile, daily consumption rose 9.4% to 114.1 Bcf compared to 104.3 Bcf in the previous week primarily due to stronger demand from the power and residential/commercial sectors.

Futures Shrug Off the Bearish EIA Report on Colder Weather Forecasts

The natural gas futures market shrugged off smaller-than-expected decline in U.S. supplies, with the commodity posting a 3.4% weekly gain. Futures for February delivery rose after weather updates show cooler weather and optimistic signs for heating demand over the next two weeks. Still, natural gas – at $2.202 per MMBtu – is down more than a dollar from where it was last year.

Natural Gas Still Suffers From Severely Depressed Prices

No major commodity had a worse 2019 than natural gas. The fuel endured a torrid year, registering its worst annual decline since 2014. Prices tumbled more than 25% last year, falling to multi-year lows of around $2.1 per MMBtu in between, as buyers fled the market over growing worries about record output and concerns of an ongoing supply glut.

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.  

But thanks to soaring shale output, the United States has been the world's largest natural gas producer since 2009. Higher recovery rates from major unconventional fields have helped unleash record volumes regularly. As a matter of fact, the EIA forecasts that the United States is likely to have produced 92.1 billion cubic feet a day (Bcf/d) of dry natural gas in 2019, up from the 2018 average of 83.4 Bcf/d - a record high for the second consecutive year. The agency also projected that domestic gas output would rise to an all-time high of 95.1 Bcf/d in 2020. In other words, record-high production in the United States and expectations for healthy growth through 2020 means that supply will keep pace with demand.

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 $2.2 per MMBtu.

True, shale production growth is expected to slow this year but prices are unlikely to eclipse the psychologically $3 threshold on a sustainable basis, if at all, as upstream players will look to add volumes as prices improve.

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, most gas-focused names took a pounding last year. Shares of EQT Corporation EQT, Montage Resources Corporation MR, Gulfport Energy Corporation GPOR, Southwestern Energy Company (SWN - Free Report) etc. – all carrying a Zacks Rank #3 (Hold) – have fallen somewhere between 40% and 65% over the past 12 months. Some like Cabot Oil & Gas Corporation COG is further down the pecking order, with a Zacks Rank #4 (Sell).

If you are still looking for near-term natural gas play, SilverBow Resources, Inc. SBOW might be an excellent selection. The Houston, TX-based company – with a Zacks Rank #1 (Strong Buy) – has seen the Zacks Consensus Estimate for 2020 rise 11.6% over 60 days.

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