U.S. Natural Gas: Weekly Analysis of the EIA Inventory Data

The U.S. Energy Department's weekly inventory release showed a higher-than-expected increase in natural gas supplies. Despite the bearish inventory numbers, the low stockpile levels and continued strong liquefied natural gas (“LNG”) feedgas deliveries suggest that the fuel’s prices will remain favorable in the short and medium term.

EIA Reports a Build Bigger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose by 46 billion cubic feet (Bcf) for the week ended Aug 13, including the impact of a reclassification of some of the commodity’s supply from base to working (available in the market) that increased working gas stocks by 4 Bcf. Excluding the adjustment, the build was 42 Bcf compared to the guidance of a 35 Bcf addition per the analysts surveyed by S&P Global Platts. The increase was equal to the five-year (2016-2020) average net build but came below last year’s addition of 45 Bcf for the same corresponding week.

The latest injection puts total natural gas stocks at 2,822 billion cubic feet (Bcf), which is 547 Bcf (16.2%) below the 2020 level at this time and 178 Bcf (5.8%) lower than the five-year average.

Total supply of natural gas averaged 98 Bcf per day, essentially unchanged on a weekly basis as dry production stayed roughly flat.
 
Meanwhile, daily consumption edged up 0.7% to 91.1 Bcf from 90.5 Bcf in the previous week, primarily due to increased LNG deliveries.

Natural Gas Inches Lower

Natural gas prices trended slightly downward last week following the higher-than-expected inventory build. Futures for September delivery ended Friday at $3.85 per million British thermal units (MMBtu) on the New York Mercantile Exchange, falling 0.3% from the previous week’s closing. The decrease in the price of natural gas is also the result of subdued cooling demand with peak summer drawing to a close.

Wrap-Up

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models are anticipating moderate temperature-driven consumption, after which prices have gone down. Nevertheless, the commodity’s medium-term outlook continues to be favorable.

For starters, the low stockpile levels — well below normal for this time of the year — have been supporting the price of the energy commodity with the apprehension that the market might enter the winter withdrawal season with supply shortage. Secondly, despite the odd hiccup, LNG export is likely to stay healthy for the foreseeable future, providing a further boost to U.S. natural gas futures. Consequently, the scenario for the primary U.S. power plant fuel is expected to be healthy. In fact, natural gas broke the $4 threshold late last month and recently jumped to its highest since December 2018.  

Overall, given natural gas’ fundamental set-up, prices are expected to stay strong. This should aid gas-weighted producers like Cabot Oil & Gas Corporation COG and Range Resources Corporation RRC. Cabot sports a Zacks Rank #1 (Strong Buy), while Range Resources carries a Zacks Rank #2 (Buy).

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

Cabot is an independent gas exploration company with producing properties mainly in the continental United States. The company owns around 175,000 net acres in the dry gas window of the Marcellus play. Cabot boasts of one of the strongest balance sheets among the natural gas-focused E&P group. The company's total assets are almost double that of its total liabilities, reflecting safety regarding debt payments, robust financing power and the ability to increase stock repurchases. Over 30 days, this 100% natural gas producer has seen the Zacks Consensus Estimate for 2021 increase 3.6%. Investors should know that Cabot recently raised its quarterly dividend by 10% for its sixth hike since May 2017.

Range Resources — among the top 10 natural gas producers in the United States — has a strong footing in the prolific Appalachian Basin. In the gas-rich resource, the upstream firm has huge inventories of low-risk drilling sites that are likely to provide production for several decades. Over 30 days, Range Resources has seen the Zacks Consensus Estimate for 2021 increase 10.9%. Natural gas contributed 68.9% to the company’s latest quarterly production.

For natural gas operators like Comstock Resources CRK, Antero Resources AR, SilverBow Resources SBOW and EQT Corporation EQT, investors should wait for a better entry point before buying their shares. All the companies carry a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.