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Large Natural Gas Injection Compounds Bearish Sentiment

Nilanjan Choudhury
The positive sentiment is unlikely to last and the commodity is expected to give way to pressure from rising production.

The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The bearish injection, which was also higher than the five-year average, intensified a sell-off that left the U.S. benchmark with its lowest close in three years.

Analysis: Higher-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 114 billion cubic feet (Bcf) for the week ended May 24, above the guidance (of 95 Bcf gain) as per the analysts surveyed by S&P Global Platts. Moreover, the increase was higher than the five-year (2014-2018) average net injection of 97 Bcf and last year’s increase of 95 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 1.867 trillion cubic feet (Tcf) - 156 Bcf (9.1%) above 2018 levels at this time but 257 Bcf (12.1%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged around 94.5 Bcf per day, up 1% on a weekly basis as dry production rose. Meanwhile, daily consumption increased 2.5% to 78.8 Bcf primarily due to stronger power sector demand on higher-than-normal temperatures in California and the U.S. Northeast.

Natural Gas Futures Log Lowest Finish Since 2016

Natural gas futures dropped Thursday, with the fuel losing 7.7 cents, or 2.9% to settle at $2.547 per MMBtu, after U.S. government data revealed a weekly injection in domestic stockpiles that was much more than expected. Prices extended their decline into Friday, dropping as much as 3.7% to $2.454 per MMBtu, their lowest level in about three years.

What's 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) having ended in March, consumption is likely to decline in the near term.

Still Fancy a Gas-Weighted Producer?

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 Corp. GPOR, Antero Resources AR, Cabot Oil & Gas Corp. COG, SilverBow Resources, Inc. SBOW, Chesapeake Energy Corp. 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 near-term natural gas play, Montage Resources Corp. MR might be an excellent selection. The company has a Zacks Rank #1 (Strong Buy).

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

Over 30 days, the Irving, TX-based company has seen the Zacks Consensus Estimate for 2019 earnings per share increase 78.5% to $2.66.

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