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What the EIA Inventory Numbers Say About Natural Gas Stocks

Nilanjan Choudhury

The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The injection was also higher than the five-year average.

Another Triple-Digit Build

Stockpiles held in underground storage in the lower 48 states rose by 112 billion cubic feet (Bcf) for the week ended Sep 27, above the guidance (of 109 Bcf gain). The increase was also higher than the five-year (2014-2018) average net injection of 83 Bcf and last year’s addition of 91 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 3.317 trillion cubic feet (Tcf) - 465 Bcf (16.3%) above 2018 levels at this time but 18 Bcf (0.5%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged 98.6 Bcf per day, up 1.2% on a weekly basis as dry production inched up to 94 Bcf per day from 93 Bcf per day. Meanwhile, daily consumption increased 2.6% to 83.8 Bcf compared to 81.7 Bcf in the previous week primarily due to higher residential/commercial sector demand.

Healthy Production Growth to Outstrip Increase in Demand

The demand for cleaner fuels and the commodity’s relatively lower price has catapulted natural gas' share of domestic electricity generation to 37%, from 25% in 2011. Moreover, new pipelines to Mexico, together with large-scale liquefied gas export facilities mean 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.

Investors Should Wait for a Better Time to Build a Position

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 92.8 Bcf per day, there is little room for prices to improve meaningfully from their current levels of around $2.3 per MMBtu.

The bearish natural gas fundamentals and its seasonal nature are responsible for the understandable reluctance on investors’ part to dip their feet into these stocks. In fact, the commodity fell to more than three-year lows in August.

Therefore, investors should preferably avoid natural gas-heavy upstream companies like EQT Corporation EQT, SilverBow Resources, Inc. SBOW, Cabot Oil & Gas Corporation COG, Montage Resources Corporation MR, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN etc. at the present time and wait for a better entry point.

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