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Bullish EIA Data Unable to Stop Natural Gas Price Slump

Nilanjan Choudhury

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. However, the positive sentiment was overwhelmed by unfavorable short-term temperature prediction and rising production, which led prices to squeeze down.

A Smaller-than-Expected Increase in Supplies

Stockpiles held in underground storage in the lower 48 states rose by 59 billion cubic feet (Bcf) for the week ended Aug 16, below the guidance (of 61 Bcf gain). However, the increase was higher than the five-year (2014-2018) average net injection of 51 Bcf and last year’s addition of 47 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 2.797 trillion cubic feet (Tcf) - 369 Bcf (15.2%) above 2018 levels at this time but 103 Bcf (3.6%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged 96.9 Bcf per day, up around 1% on a weekly basis as dry production rose and 9.5% more gas flowed into the country from Canada. Meanwhile, daily consumption remained essentially flat at 87.1 Bcf compared to 86.5 Bcf in the previous week as declining power generation demand was offset by increased deliveries to LNG export terminals.

Prices Still Suffer a Weekly Drop

The natural gas futures market shrugged off the lower-than-expected climb in U.S. supplies, with the commodity posting a 2.2% weekly loss. Futures for September delivery fell after weather updates showed forecasts of mild temperatures in a number of regions of the Lower 48 U.S. states that would hamper the air conditioning demand for natural gas.

Market Dynamics Points to Further Pains

The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 35%, 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.  

However, record high production in the United States and expectations for healthy growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements.

Conclusion

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 92.1 Bcf per day, there is little room for prices to improve meaningfully from their current levels of around $2.15 per MMBtu. In fact, the commodity fell to lows not seen since May 2016 earlier this month.

Gas-Focused Equities Out of Favor

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.

Moreover, most natural gas-heavy upstream companies like EQT Corporation EQT, SilverBow Resources, Inc. SBOW, Montage Resources Corporation MR, Cabot Oil & Gas Corporation COG, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN etc. carry a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them. Some like Chesapeake Energy Corporation CHK is further down the pecking order, with a Zacks Rank #4 (Sell).

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

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