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Natural Gas Price Gains Kept in Check by Soaring Production

Nilanjan Choudhury

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies, which led prices to be squeezed up, with an added push in the wake of favorable short-term temperature prediction. But the positive sentiment is unlikely to last and the commodity is expected to give way to pressure from rising production.

Supplies Grew by 49 Bcf

Stockpiles held in underground storage in the lower 48 states rose by 49 billion cubic feet (Bcf) for the week ended Aug 9, below the guidance (of 54 Bcf gain). However, the increase was higher than last year’s increase of 35 Bcf for the reported week and in line with the five-year (2014-2018) average net injection.

The latest rise in inventories puts total natural gas stocks at 2.738 trillion cubic feet (Tcf) - 357 Bcf (15%) above 2018 levels at this time but 111 Bcf (3.9%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged 96 Bcf per day, unchanged on a weekly basis as dry production remained flat. Daily consumption also remained essentially flat at 86.6 Bcf with 86.8 Bcf in the previous week on static power generation demand.

Prices Edge Up

The natural gas futures market rose following the smaller-than-expected climb in U.S. supplies, with the commodity posting a 3.8% weekly gain and erasing some of the steep losses that have taken it to lows not seen since May 2016 earlier this month. Weather forecasting models predicting hot temperatures in certain regions of the Lower 48 U.S. states that would drive up the air conditioning demand for natural gas also helped lift prices higher

Healthy Supplies to Restrict Major Rebound

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 healthy growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements.

Conclusion

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 92.1 Bcf per day, there is little room for prices to improve meaningfully from their current levels of around $2.20 per MMBtu.    

Gas-Focused Equities Out of Favor

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.

Moreover, most natural gas-heavy upstream companies like EQT Corporation EQT, SilverBow Resources, Inc. SBOW, Montage Resources Corporation MR, Cabot Oil & Gas Corporation COG, 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. Some like Gulfport Energy Corporation GPOR and Chesapeake Energy Corporation CHK are further down the pecking order, with a Zacks Rank #4 (Sell).

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

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Southwestern Energy Company (SWN) : Free Stock Analysis Report
 
EQT Corporation (EQT) : Free Stock Analysis Report
 
Eclipse Resources Corporation (MR) : Free Stock Analysis Report
 
Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
 
Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
 
Gulfport Energy Corporation (GPOR) : Free Stock Analysis Report
 
SilverBow Resources Inc. (SBOW) : Free Stock Analysis Report
 
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