The U.S. Energy Department’s weekly inventory release showed a lower-than-expected increase in natural gas supplies. Following the positive inventory numbers, futures gained nearly 17% week over week to close at their highest since March. Other factors noted in last week’s spike are a hint of tightening supply and predictions of strong cooling demand.
Despite all this, the market hasn’t been kind to natural gas in 2023, with the commodity trading considerably lower year to date and briefly breaking below the $2 threshold for the first time since 2020.
At this time, we advise investors to focus on stocks like Chesapeake Energy CHK and Cheniere Energy LNG.
EIA Reports a Build Smaller Than Anticipated
Stockpiles held in underground storage in the lower 48 states rose 84 billion cubic feet (Bcf) for the week ended Jun 9, below the guidance of 95 Bcf addition per a survey conducted by S&P Global Commodity Insights. The build compared with the five-year (2018-2022) average net injection of 84 Bcf and last year’s growth of 94 Bcf for the reported week.
The latest increase puts total natural gas stocks at 2,634 Bcf, which is 552 Bcf (26.5%) above the 2022 level at this time and 353 Bcf (15.5%) higher than the five-year average.
The total supply of natural gas averaged 105.7 Bcf per day, down 0.6 Bcf per day on a weekly basis due to a decline in dry production.
Meanwhile, daily consumption fell 1.4% to 91.5 Bcf from 92.8 Bcf the previous week, mainly reflecting lower power burn and a decline in deliveries to LNG export terminals.
Natural Gas Prices Jump
Natural gas prices trended upward for the second successive week following the lower-than-expected inventory build. Futures for July delivery ended Friday at $2.63 on the New York Mercantile Exchange, surging 16.9% from the previous week’s closing. The improvement in natural gas realization is also the result of signs of curtailment in domestic output and favorable weather predictions.
As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts for hotter weather in the days ahead, demand is expected to be strong.
In addition to bullish weather conditions, natural gas has been pushed higher by a projected brake in upstream activity. According to energy services provider Baker Hughes, U.S. natural gas rig count — a pointer to where production is headed — is now at its lowest since February 2022. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies ahead of the impending summer cooling demand.
Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is also supporting natural gas. LNG shipments for export from the United States have been elevated for months on the back of environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies following the war in Ukraine.
Final Thoughts
Despite the last two week’s increases, the natural gas market is down 41% so far this year. Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production pattern. As such, investors are clueless about what to do. As of now, the lingering uncertainty over the fuel means that they should preferably opt for holding on to fundamentally strong stocks like Chesapeake Energy and Cheniere Energy.
Chesapeake Energy: Chesapeake has a premier portfolio with more than 15 years of inventory spread over some 2,200 locations, and around 90% of its total output comprises natural gas. The Zacks Rank #3 (Hold) company’s exposure to premium markets and focus on costs and margins should help it to benefit from any increase in natural gas prices.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Chesapeake beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 26.6%. Valued at around $11 billion, CHK has gained 2.6% 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 certainly enjoys a distinct competitive advantage.
Cheniere Energy has a projected earnings growth rate of 452% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 91.6% upward over the past 60 days. LNG shares have gained 18% in a year.
At the same time, investors might want to sell some bottom-ranked stocks like SilverBow Resources SBOW.
SilverBow Resources: SBOW has operations across roughly 130,000 net acres in the Eagle Ford, and more than 80% of its total output comprises natural gas.
SilverBow Resources has a projected earnings growth rate of (53.3%) for the current year. Valued at $613.6 million, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 28.6% downward over the past 60 days. SBOW shares have lost 24.1% in a year.
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