The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies that was also higher than the five-year average and the year-ago rise. However, prices rose despite data showing swelling stockpiles as market participants chose to focus on a bullish weather forecast, with an added push in the wake of a storm in the Gulf of Mexico (GoM). But the positive sentiment is unlikely to last and the commodity is expected to give way to pressure from rising production.
Supplies Grew by 81 Bcf
Stockpiles held in underground storage in the lower 48 states rose by 81 billion cubic feet (Bcf) for the week ended Jul 5, above the guidance (of 72 Bcf gain). Moreover, the increase was higher than the five-year (2014-2018) average net injection of 71 Bcf and last year’s increase of 55 Bcf for the reported week.
The latest rise in inventories puts total natural gas stocks at 2.471 trillion cubic feet (Tcf) - 275 Bcf (12.2%) above 2018 levels at this time but 142 Bcf (5.4%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged 95.7 Bcf per day, essentially unchanged on a weekly basis. While dry production inched up to 90.3 Bcf per day from 89.8 Bcf per day, 3.6% less gas flowed into the country from Canada.
Meanwhile, daily consumption was down 0.8% to 84.4 Bcf compared to 85.1 Bcf in the previous week primarily due to lower industrial sector demand even as the usage of natural gas-fired power to run air-conditioners increased.
Storm in GoM Raise Concerns About Gas production, Aids Prices
The natural gas futures market shrugged off larger-than-expected climb in U.S. supplies, with the commodity posting a 1.4% weekly gain and further erasing some of the steep losses that have taken it to lows not seen since May 2016. Futures for August delivery rose after weather updates show a wave of intense heat in central and eastern U.S. and optimistic signs for cooling demand over the next few days.
The commodity also rose on worries about Tropical Storm Barry that has sharply curtailed offshore natural gas production in the GoM. Still, natural gas – at $2.453 per MMBtu – is far off the $3.722 per MMBtu 2019-high reached in January. Recently, the fuel hit a more than three-year low of $2.185.
Healthy Supply to Restrict Price Gains
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.
Natural gas prices might experience short-lived surge based on positive weather forecasts and potential storm-induced supply disruptions but any powerful turnaround looks unlikely at the moment. A case in point is the spike seen last week that was mainly on account of expectations of above-average temperatures and disruptions in the wake of Tropical Storm Barry.
Want to Bet on a Gas-Weighted Company?
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.
Moreover, most natural gas-heavy upstream companies like Gulfport Energy Corporation GPOR, Montage Resources Corporation MR, Cabot Oil & Gas Corporation COG, , 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 Ultra Petroleum Corp. UPL and SilverBow Resources, Inc. SBOW are further down the pecking order, with Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell), respectively.
If you are looking for near-term natural gas-related play, Cheniere Energy, Inc. LNG 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.
The 2019 Zacks Consensus Estimate for this Houston, TX-based company is $2.06, representing some 8.4% earnings per share growth over 2018. Next year’s average forecast is $3.69 pointing to another 79.1% growth.
Cheniere Energy foresees the fundamentals of liquefied natural gas to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation worldwide and in the Asia-Pacific region in particular. 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.
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Southwestern Energy Company (SWN) : Free Stock Analysis Report
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