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Why Natural Gas Prices Are Unlikely to Stage a Big Rebound

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Natural gas futures collapsed to a 25-year low below $1.50 per MMBtu in late June, due in part to an ongoing supply glut made worse by the coronavirus-induced drop off in usage.

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:

Plentiful Supply of Natural Gas

Stockpiles held in underground storage in the lower 48 states rose by 65 billion cubic feet (Bcf) for the week ended Jun 26, lower than the guidance (of 77 Bcf gain). The increase was also below last year’s build of 92 Bcf, while it matched the five-year (2015-2019) average net addition of 65 Bcf for the reported week.

The latest uptick puts total natural gas stocks at 3.077 trillion cubic feet (Tcf) - 712 Bcf (30.1%) above 2019 levels at this time and 466 Bcf (17.8%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 92.6 Bcf per day, edging up 0.5% on a weekly basis due to higher shipments from Canada even as dry production decreased slightly.

Meanwhile, daily consumption was up 8.6% to 80.7 Bcf compared to 74.3 Bcf in the previous week primarily due to stronger demand from the power sector on hotter weather.

The Commodity Craters to 25-Year Lows

The novel coronavirus outbreak should actually help natural gas prices on prospects of lower volumes. Analysts believe that the brake in skyrocketing shale oil production growth – tied to the crude price collapse - will also limit associated gas output, thereby cutting the massive supply glut. As of now though, the perceived economic benefit of the pandemic seems to be offset by slowdown in the fuel’s consumption due to the crisis.

In other words, there is still plenty of skepticism and pessimism evident in the market. In fact, the commodity traded to the lowest price since 1995 when it fell to $1.432 per MMBtu in late June. Prices have since rebounded modestly, with natural gas on Thursday settling at $1.734 on higher air conditioning use.

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

Low Price Environment to Prevail

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.

Is There Any Investment 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 related names across the board, especially the ones carrying a Zacks Rank #2 (Buy) - EQT Corporation (EQT - Free Report) , Montage Resources , Gulfport Energy (GPOR - Free Report) , Antero Resources (AR - Free Report) and Range Resources (RRC - Free Report) .

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

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