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Natural Gas Prices Plummet on Supply Data, Weather

Zacks

The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies following which the commodity traded down. Moreover, worries over the fuel’s tepid demand on the back of bearish weather predictions put more pressure on natural gas prices.

About the Weekly Natural Gas Storage Report

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.


Analysis of the Data: A Larger-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 72 billion cubic feet (Bcf) for the week ended June 30, 2017, above the guidance (of 63 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider. Worse, the increase was higher than both last year’s addition of 38 Bcf and the 5-year (2012-2016) average net injection of 66 Bcf for the reported week.

This caused the current storage level – at 2.888 trillion cubic feet (Tcf) – widen its surplus to the five-year average to 187 Bcf (6.9%), while stocks are 285 Bcf (9.0%) lower than the year-ago figure.

The bearish build in natural gas inventories created immediate selling pressure on the commodity, which tumbled 5.6% for the week to end Friday at $2.864 per MMBtu. Apart from the EIA data, the electricity generation fuel also sold off as investors took note of cooler-than-normal weather predictions (translating into lower heating gas demand) for the week ahead.

Positive Long-Term Thesis

Despite occasional hiccups, the natural gas demand situation looks promising with hot conditions set to prevail in most U.S. pockets in the later part of July and power generators burning more gas to meet intensifying cooling demand.

In any case, long-term fundamentals for the commodity continue to be supportive on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming exports to Mexico, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output. The resulting effect will ensure natural gas storage keeping pace with the 5-year average in the near future, with deficits piling up later on.

Over the summer, these secular tailwinds are likely to have a positive impact on natural gas sentiment and price.

Which Stocks to Bet On

The perceived price strength augurs well for natural gas-heavy upstream companies like Rice Energy Inc. RICE, Chesapeake Energy Corp. CHK, Southwestern Energy Co. SWN, WPX Energy Inc. WPX, Cabot Oil & Gas Corp. COG and EQT Corp. EQT.

However, each of these firms has a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.

In case you are looking for natural gas names for your portfolio, one could opt for Cheniere Energy Inc. LNG. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

With domestic prices remaining constrained on the back of abundant supplies, the company sees a big opportunity in selling U.S. natural gas production at higher prices overseas. Houston, TX-based Cheniere Energy is the only liquefied natural gas exporter of the U.S. and plans to turn the commodity’s glut into export revolution, currently exporting to over 20 countries.

The 2017 Zacks Consensus Estimate for this company is for a loss of 13 cents, representing some 93.1% earnings per share growth over 2016. Next year’s average forecast is 56 cents, pointing to another 514.8% growth.

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