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Is Production Downturn the Cure for Low Natural Gas Prices?

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Amid all the headlines about the stunning recovery in oil prices, natural gas is struggling with its own set of problems.

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 over growing worries about record output, soaring flaring levels and concerns of an ongoing supply glut.

So far this year, the story has been more of the same with the price of the volatile energy commodity falling to the lowest level in 25 years in March as it faced the prospect of a coronavirus-related steep drop-off in usage. The fuel was already on the defensive because of mild winter weather (leading to pessimistic heating demand) amid strong production.

Since then, the commodity has made a slight recovery on prospects of less "associated gas" draining the oversupply amid hopes of rising demand due to warmer temperatures.   

Let us see how the natural gas situation looks like after the U.S. Energy Department's latest weekly inventory release:

Ample Volumes of Gas in Inventory

Stockpiles held in underground storage in the lower 48 states rose by 102 billion cubic feet (Bcf) for the week ended May 29, lower the guidance (of 111 Bcf gain). Moreover, the increase was lower than last year’s build of 118 Bcf and the five-year (2015-2019) average net addition of 103 Bcf for the reported week.

The latest uptick puts total natural gas stocks at 2.714 trillion cubic feet (Tcf) - 762 Bcf (39%) above 2019 levels at this time and 422 Bcf (18.4%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 93.9 Bcf per day, up 0.9% on a weekly basis due to slight increase in dry production and higher shipments from Canada.

Meanwhile, daily consumption was up 2.6% to 79 Bcf compared to 77 Bcf in the previous week primarily due to stronger demand from the power sector.

Prices Remain Range Bound

The novel coronavirus outbreak helped natural gas prices recover somewhat on prospects of lower volumes, only to witness intermittent selling pressure. Nevertheless, the fuel has gained a bit on expectations of a brake in the skyrocketing shale oil production growth that will also limit associated gas output, thereby cutting the massive supply glut.

However, there is still plenty of skepticism and pessimism evident in the market. In fact, the commodity traded to the lowest price since September 1995 when it hit $1.52 per MMBtu in late March. Prices have since rebounded modestly, with natural gas on Thursday settling at $1.822.

Over the past few weeks, the commodity has oscillated into a trading range between $1.5 and $2.

Too Many Headwinds Restrict Upside

Natural gas is unlikely to see a big breakout with several headwinds pressuring an already oversupplied market.

Volumes flowing to LNG export plants have dropped to multi-month lows due to weak international demand associated with the coronavirus-imposed lockdowns. Moreover, increasing downward pressure on European and Asian gas prices have made American fuel less competitive, lowering LNG demand in the process.     

In addition, the coronavirus has significantly curtailed industrial use of natural gas. All of this comes at a time when the commodity was already struggling with weak consumption because of a warmer-than-expected winter 2019-2020.

Supply Drop Off Create Opportunity

Natural gas might experience short-lived surge based on positive weather forecasts though any powerful turnaround looks unlikely now. But medium-term incentives do remain, with lower ‘associated gas’ — created during oil drilling — potentially draining supply as crude prices collapse. As a proof of the impending supply drop, the EIA expects that the United States will churn out 89.8 billion cubic feet a day (Bcf/d) of dry natural gas this year, down from the 2019 average of 92.2 Bcf/d.

This should lift the prospects for natural gas companies across the board, especially the ones carrying a Zacks Rank #2 (Buy) - EQT Corporation (EQT - Free Report) , SilverBow Resources, Inc. (SBOW - Free Report) , Gulfport Energy Corporation (GPOR - Free Report) , Comstock Resources (CRK - Free Report) and CNX Resources Corporation (CNX - Free Report) .

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

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