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, sparked a sell-off yesterday that left the U.S. benchmark with its largest one-day percentage loss since mid-July.
A Larger-than-Expected Increase in Supplies
Stockpiles held in underground storage in the lower 48 states rose by 84 billion cubic feet (Bcf) for the week ended Sep 13, above the guidance (of 76 Bcf gain). The increase was slightly higher than the five-year (2014-2018) average net injection of 82 Bcf and was same as last year’s addition.
The latest rise in inventories puts total natural gas stocks at 3.103 trillion cubic feet (Tcf) - 393 Bcf (14.5%) above 2018 levels at this time but 75 Bcf (2.4%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged 96.2 Bcf per day, essentially unchanged on a weekly basis as dry production remained flat. Meanwhile, daily consumption was down 2.1% to 83.2 Bcf compared to 85 Bcf in the previous week primarily due to lower power sector demand driven by below average temperatures across most of U.S. This was partly offset by increased deliveries to LNG export terminals.
Prices End Sharply Lower
The natural gas futures market slumped following the bigger-than-expected climb in U.S. supplies, with the commodity posting a 3.8% loss yesterday and erasing some of the steep gains over the past two weeks associated with warmer weather and higher cooling demand. Futures for October delivery also fell after weather updates showed forecasts of mild temperatures in a number of regions of the Lower 48 U.S. states that would hamper the demand for natural gas this upcoming winter heating season.
Surging Production Limits Upside Potential
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.
Avoiding Gas-Focused Equities is a Good Idea
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 $2.5 per MMBtu.
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. In fact, the commodity fell to lows not seen since May 2016 last month.
Moreover, most natural gas-heavy upstream companies like EQT Corporation EQT, SilverBow Resources, Inc. SBOW, Cabot Oil & Gas Corporation COG, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN etc. carry a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point.
If you are still looking for near-term natural gas play, Montage Resources Corporation 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 stocks here.
Over 30 days, the Irving, TX-based company has seen the Zacks Consensus Estimate for 2019 earnings per share increase 8% to $1.88.
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