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 mild winter weather forecasts amid strong production, which caused prices to stay under $2.
Drawdown Beat Estimates but Storage Remain Well Above 5-Year Average
Stockpiles held in underground storage in the lower 48 states fell by 137 billion cubic feet (Bcf) for the week ended Jan 31, above the guidance (of 126 Bcf fall). However, the decrease was lower than the five-year (2015-2019) average net shrinkage of 143 Bcf and last year’s drop of 228 Bcf for the reported week
The latest withdrawal puts total natural gas stocks at 2.609 trillion cubic feet (Tcf) - 615 Bcf (30.8%) above 2019 levels at this time and 199 Bcf (8.3%) over the five-year average.
Fundamentally speaking, total supply of natural gas averaged 99.7 Bcf per day, essentially unchanged on a weekly basis as dry production remained flat.
Meanwhile, daily consumption edged up 1.4% to 114.6 Bcf compared to 113 Bcf in the previous week primarily due to stronger demand from the industrial and residential/commercial sectors.
Futures Little Changed
Despite the larger-than-expected decline in U.S. supplies, natural gas prices were essentially unmoved last week, edging up a miniscule 0.9% after weather updates showed milder temperatures and pessimistic signs for heating demand over the next few days. No wonder, then, that natural gas – at $1.858 per MMBtu – is down almost 30% from where they were last year. In fact, the commodity recently dropped even further to $1.804 - the lowest level since May 2016.
What’s Behind Natural Gas’ Price Collapse?
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, as buyers fled the market over growing worries about record output and concerns of an ongoing supply glut. Natural gas continues to face bearish pressure in 2020 with warmer-than-expected winter weather playing spoilsport and taking the price below the psychologically important level of $2.
Agreed, 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.
Brace for a Wild Ride
Natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. With output from shale formations swamping the market, there is little room for prices to improve meaningfully from their current levels.
True, shale production growth is expected to slow this year but prices are unlikely to eclipse the $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 during the past year. Shares of EQT Corporation
EQT, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN etc. – all carrying a Zacks Rank #3 (Hold) – have fallen somewhere between 55% and 80% over the past 12 months. Some like Montage Resources Corporation MR, SilverBow Resources, Inc. SBOW and Cabot Oil & Gas Corporation ( COG Quick Quote COG - Free Report) are further down the pecking order, with a Zacks Rank #5 (Strong Sell).
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