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Strong Production, Mild Weather Keeps Natural Gas Prices Low

Nilanjan Choudhury

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. However, the injection was higher than the five-year average as mild weather continues to limit heating and air conditioning demand.

Analysis: Less-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 100 billion cubic feet (Bcf) for the week ended May 17, below the guidance (of 103 Bcf gain) as per the analysts surveyed by S&P Global Platts. However, the increase was higher than the five-year (2014-2018) average net injection of 88 Bcf and last year’s increase of 93 Bcf for the reported week.

The latest rise in inventories puts total natural gas stocks at 1.753 trillion cubic feet (Tcf) - 137 Bcf (8.5%) above 2018 levels at this time but 274 Bcf (13.5%) under the five-year average.

Fundamentally speaking, total supply of natural gas averaged around 93.6 Bcf per day, essentially unchanged on a weekly basis even as dry production edged down slightly. Meanwhile, daily consumption fell 2.5% to 75 Bcf primarily due to weaker residential/commercial demand.

Natural Gas Futures Remain Just Above $2.5

While natural gas futures have edged up a bit from the 3-year lows of below $2.5 per MMBtu in April and currently trade around $2.6 per MMBtu, it’s still 47% below the four-year high of $4.929 per MMBtu reached in mid-November.

The early onset of winter, together with the lowest level of stocks in 15 years, demand from power plants and growing LNG shipments lifted the commodity to almost $5 per MMBtu. But the euphoria didn’t last long as a mild weather led to smaller withdrawals that markedly reduced the storage deficit and sent prices lower.

What Is 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.

Want to Own a Natural Gas Stock Now?

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 Corporation GPOR, Antero Resources AR, Cabot Oil & Gas Corporation COG, SilverBow Resources, Inc. SBOW, 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 Chesapeake Energy Corporation CHK are further down the pecking order, with Zacks Rank #4 (Sell).

If you are looking for near-term natural gas play, Montage Resources Corp. MR might be a good selection. The company has a Zacks Rank #2 (Buy).

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

This Irving, TX-based company has a good earnings surprise history, having surpassed estimates in three of the last four quarters.

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