The U.S. Energy Department's weekly inventory release showed a bigger-than-expected decrease in natural gas supplies. However, the drawdown fell short of the five-year average.
Analysis of the EIA Inventory Data
Stockpiles held in underground storage in the lower 48 states fell by 36 billion cubic feet (Bcf) for the week ended Mar 22, above the guidance (of 33 Bcf decline) as per the analysts surveyed by S&P Global Platts. However, the decrease was lower than both the five-year (2014-2018) average net shrinkage of 41 Bcf and last year’s drop of 66 Bcf for the reported week.
Following past week’s supply decline, at 1.107 trillion cubic feet (Tcf), natural gas inventories are 551 Bcf (33.2%) under the five-year average and 285 Bcf (20.5%) below the year-ago figure.
Fundamentally speaking, total supply of natural gas averaged around 94.2 Bcf per day, up 0.9% on a weekly basis as dry production edged up. Meanwhile, daily consumption fell 3.8% to 87.7 Bcf primarily due to weaker demand across the board – in the residential/commercial, power and industrial sectors.
Natural Gas Futures Struggle to Break Above $3
While natural gas futures have edged up a bit from the recent low of $2.543 per MMBtu in early February and currently trade around $2.7 per MMBtu, it’s still 44% below the four-year high of $4.929 per MMBtu reached in mid-November. The early onset of winter, together with the lowest level of stocks in 15 years, demand from power plants and growing LNG shipments lifted the commodity to almost $5 per MMBtu. But the euphoria didn’t last long as mild weather in December and early January led to smaller withdrawals that markedly reduced the storage deficit and sent prices lower.
What is the Future of Natural Gas Prices?
The fundamentals of natural gas consumption continue to be favorable. 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 explosive growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements. Also, with the traditional withdrawal season (when supplies fall on heating demand due to cold weather) énding in March, consumption is likely to decline in the near term.
Want to Own a Natural Gas Stock Now?
The uncertain natural gas fundamentals (considering 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 Gulfport Energy Corporation GPOR, Range Resources Corporation RRC, SilverBow Resources, Inc. SBOW, Chesapeake Energy Corporation CHK, 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.
If you are looking for a near-term natural gas play, Antero Resources AR might be an excellent selection. The company has a Zacks Rank #1 (Strong Buy).
This Denver, CO-headquartered company’s expected EPS growth rate for three to five years currently stands at 20%, comparing favorably with the industry's growth rate of 18.8%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Southwestern Energy Company (SWN) : Free Stock Analysis Report
Range Resources Corporation (RRC) : Free Stock Analysis Report
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