The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies - the season’s first withdrawal. However, the positive sentiment was overwhelmed by the lack of meaningful demand amid strong production, which led prices to trickle down.
The Withdrawal Season is Underway
Stockpiles held in underground storage in the lower 48 states fell by 94 billion cubic feet (Bcf) for the week ended Nov 15, above the guidance (of 91 Bcf fall). The decrease was also higher than the five-year (2014-2018) average net shrinkage of 32 Bcf but came below last year’s drop of109 Bcf for the reported week.
The first withdrawal of the year puts total natural gas stocks at 3.638 trillion cubic feet (Tcf) - 506 Bcf (16.2%) above 2018 levels at this time though supplies remain 60 Bcf (1.6%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged 100.2 Bcf per day, essentially unchanged on a weekly basis as higher dry production was offset by lower shipments from Canada.
Meanwhile, daily consumption decreased 3.7% to 104.2 Bcf compared to 108.2 Bcf in the previous week primarily due to lower power and residential/commercial sector demand.
Arrival of Peak Demand Season Fails to Lift Futures
The onset of the withdrawal season and period of peak demand failed to move prices higher. In fact, the natural gas futures market fell despite the bigger-than-expected draw in U.S. supplies, with the commodity posting a 0.9% weekly loss. Futures for December delivery were unable to rally after weather updates showed forecasts of colder temperatures in the Lower 48 U.S. states but not cold enough to substantially drain the bloated stockpiles.
Record Levels of Domestic Production 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 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.
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 $2.6 per MMBtu.
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. In fact, the commodity fell to more than three-year lows in August.
Moreover, most 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. carry a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point.
If you are still looking for near-term natural gas play, CNX Resources Corporation CNX might be a good selection. The Canonsburg, PA-based company – with a Zacks Rank #2 (Buy) – has seen the Zacks Consensus Estimate for 2019 rise 15.6% over 30 days.
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