Natural gas prices moved past $5.40 per million British thermal units (MMBtu) in trading on Wednesday to finish the day at $5.46. That was the highest settlement since February 2014. While the contract pulled back slightly from that level on Thursday and Friday’s session to settle at $5.105 per MMBtu, it still registered the fourth weekly climb in a row. As a matter of fact, natural gas prices have more than doubled year to date and a staggering 250% off the 25-year lows from June 2020.
Let’s discuss the most important factors shaping the commodity’s stunning rally.
Slow Restoration of Hurricane-Affected Operations: A large part of natural gas’ recent bull run has been supported by hurricane-curtailed supplies. Ida — the year’s ninth named storm — made landfall in Louisiana on Aug 29, resulting in copious rainfall, catastrophic wind damage, and power losses for hundreds of thousands of customers. This was followed by Hurricane Nicholas earlier this month. In particular, the extreme weather events significantly disrupted natural gas production from the Gulf of Mexico and some of it remains offline. The platform shutdowns have dragged down daily production to around 90 Bcf of late when an average of around 93 Bcf is needed to balance the demand.
Late-Season Hot Weather: Domestic usage has been strong over the 2021 summer months as record-breaking heat in most parts of the country led to a higher power burn (or cooling demand) for the fuel. Besides, the latest models are anticipating lofty temperatures for the remainder of September, which will keep on driving the commodity’s consumption above normal levels.
Strong LNG Export Demand: Shipments of liquefied natural gas (“LNG”) for export from the United States have been robust for months on the back of environmental reasons and higher prices of the super-chilled fuel elsewhere. Data from the Energy Information Administration’s ("EIA") suggests that over the past six years (2015-2020), exports from America surged from 28,381 million cubic feet to 2,389,838 million cubic feet – a record high. Most analysts believe that deliveries appear poised for further gains this year on surging consumption in Europe, Asia and Latin America, especially as we head into winter. The circumstances are particularly dire in Europe where gas supply is running low with the need for steady refill from U.S. ahead of the heating season.
Pre-Winter Supply Crunch: As a result of all the above-mentioned factors, current natural gas stocks — at 3,006 billion cubic feet (Bcf) — are 595 Bcf (16.5%) below the 2020 level at this time and 231 Bcf (7.1%) less than the five-year (2016-2020) average. In fact, working gas in U.S. storage currently sits at its lowest level for this time of year since 2018 going into the peak demand season.
Overall, given natural gas’ fundamental set-up, prices are expected to stay strong. The upward trend should aid gas-weighted producers like Cabot Oil & Gas COG, SilverBow Resources SBOW, Range Resources RRC and Comstock Resources CRK, while LNG exporter Cheniere Energy LNG is also primed for growth. Cabot, Range, Comstock and SilverBow sport a Zacks Rank #1 (Strong Buy), while Cheniere carries a Zacks Rank #2 (Buy).
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Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
Comstock Resources, Inc. (CRK): Free Stock Analysis Report
Range Resources Corporation (RRC) : Free Stock Analysis Report
Cheniere Energy, Inc. (LNG) : Free Stock Analysis Report
SilverBow Resources Inc. (SBOW) : Free Stock Analysis Report
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