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Natural Gas Craters to 1995 Levels on Weather Woes, Coronavirus

Nilanjan Choudhury

Natural gas futures are now at the lowest level in more than two decades as it faces the prospect of a coronavirus-related steep drop-off in usage. The fuel was already on the defensive because of mild winter weather (leading to pessimistic heating demand) amid strong production.

Let us see how the natural gas situation looks like after the U.S. Energy Department's latest weekly inventory release:

Y/Y Storage Surplus around 900 Bcf

Stockpiles held in underground storage in the lower 48 states edged down by 9 billion cubic feet (Bcf) for the week ended Mar 13, just above the guidance (of 8 Bcf fall). However, the decrease was significantly lower than last year’s drop of 91 Bcf and the five-year (2015-2019) average net shrinkage of 63 Bcf for the reported week.

The latest withdrawal puts total natural gas stocks at 2.034 trillion cubic feet (Tcf) - 878 Bcf (76%) above 2019 levels at this time and 281 Bcf (16%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 99 Bcf per day, up 0.9% on a weekly basis due to slight increase in dry production and higher shipments from Canada.

Meanwhile, daily consumption was up 2.3% to 104.1 Bcf compared to 101.8 Bcf in the previous week primarily due to stronger heating demand from the power sector.

Coronavirus & Weather Woes Roiling the Struggling Sector

While the novel coronavirus outbreak temporarily boosted natural gas prices on prospects of lower volumes, the rally was short-lived. The fuel initially gained on expectations of a brake in the skyrocketing shale oil production growth that will also limit associated gas output, thereby cutting the massive supply glut.

However, the market soon gave up on the bullish sentiment, with pessimism and skepticism taking over. In fact, the price action last week erased the minor reversal to close down 14.2% at $1.604 per MMBtu – the lowest since 1995 when it hit $1.25.

The recent decline in natural gas prices came as analysts and traders factored in worries about the slowdown in demand from the rapidly spreading coronavirus. With economic outlook in the United States darkening with each passing day, residential/commercial and industrial use of natural gas are set to slump markedly. This comes at a time when the commodity was already struggling with weak consumption because of a warmer-than-expected winter 2019-2020.  

As it is, the EIA still expects that the United States will churn out 95.3 billion cubic feet a day (Bcf/d) of dry natural gas this year, up from the 2019 average of 92.1 Bcf/d - a record high for the third consecutive year.

Expect Pain Ahead for Gas Stocks

Natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. 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, most gas-focused names took a pounding during the past year. Shares of EQT Corporation EQT, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN, SilverBow Resources, Inc. SBOW, Chesapeake Energy Corporation CHK, Cabot Oil & Gas Corporation COG etc. – all carrying a Zacks Rank #3 (Hold) – have fallen somewhere between 40% and 95% over the past 12 months. With the entire industry hit hard, the near-to-medium term outlook for gas producers looks bleak.

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

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