Natural Gas Jumps as Cold Blast Spurs Heating Demand
The U.S. Energy Department's weekly inventory release showed a higher-than-expected decrease in natural gas supplies. The bullish inventory numbers, together with a cold blast sweeping through North America drove up weather-related demand and buoyed natural gas futures, which settled with another healthy gain week over week.
Despite the spike, the market hasn't been kind to natural gas, with the commodity trading considerably lower over the past 12 months over growing worries about record output and concerns of an ongoing supply glut. At this time, we advise investors to focus on stocks like Range Resources RRC, Coterra Energy CTRA and Cheniere Energy LNG.
EIA Reports a Withdrawal Bigger Than Market Expectations
Stockpiles held in underground storage in the lower 48 states fell 140 billion cubic feet (Bcf) for the holiday-shortened week ended Jan 5, above the guidance of a 122 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The decrease compared with the five-year (2019-2023) average net shrinkage of 89 Bcf and last year’s decline of 23 Bcf for the reported week.
The latest draw puts total natural gas stocks at 3,336 Bcf, which is 436 Bcf (15%) above the 2023 level and 348 Bcf (11.6%) higher than the five-year average.
The total supply of natural gas averaged 110.8 Bcf per day, down a marginal 0.1 Bcf per day on a weekly basis due to a decrease in dry production, almost offset by higher shipments from Canada.
Meanwhile, daily consumption rose to 131.2 Bcf from 126.2 Bcf in the previous week, mainly reflecting strength in residential/commercial usage and higher power burn, to go with a pickup in exports to Mexico.
Natural Gas Prices Finish Sharply Higher
Natural gas prices surged last week following the higher-than-expected inventory decrease. Futures for February delivery — ended Friday at $3.31 on the New York Mercantile Exchange, surging some 14.5% from the previous week’s closing. The jump in natural gas realization is also the result of a pullback in supply and predictions of colder weather.
As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts of cold arctic blasts in the days ahead, usage of the commodity to generate electricity is likely to be strong.
Apart from bullish weather conditions, natural gas has been pushed higher by signs of curtailment in domestic output. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down some 22% from last year. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies.
Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. LNG shipments for export from the United States have been elevated for months, reaching record levels due to environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies due to the war in Ukraine.
Final Thoughts
Despite last couple of week’s healthy increase, the natural gas market remains an oversupplied one. As a matter of fact, it endured a torrid year in 2023, as prices tumbled more than 40%, briefly breaking below the $2 threshold for the first time since 2020.
Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production patterns. As such, investors are clueless about what to do. As of now, the lingering uncertainty over the fuel means that they should preferably hold on to fundamentally strong stocks like Range Resources, Coterra Energy and Cheniere Energy.
Range Resources: RRC is a leading operator in the prolific Appalachian Basin — a premier natural gas play — with huge inventories of low-risk drilling sites that are likely to provide production for several decades. About 68% of the Zacks #3 Rank (Hold) company’s total output is natural gas.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Range Resources beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, with the average being 33.6%. Valued at around $7.5 billion, RRC has gained 22.6% in a year.
Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. The Zacks Rank #3 company churned out an average of 2,204 million cubic feet on a daily basis from these assets in 2022.
Coterra beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 11.8%. Valued at around $19.2 billion, CTRA has risen 1.9% in a year.
Cheniere Energy: Being the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy enjoys a distinct competitive advantage.
Cheniere Energy has a projected earnings growth rate of 602.3% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 2.4% upward over the past 60 days. LNG shares have gone up 5.5% in a year.
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