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 rose more than 14% week over week. Another factor to be noted in last week's sudden spike is the hint of tightening supply.
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.
As tepid weather-related demand continues to impact the commodity's demand, we advise investors to focus on stocks like SilverBow Resources SBOW and Cheniere Energy LNG.
EIA Reports a Build Smaller Than Anticipated
Stockpiles held in underground storage in the lower 48 states rose 99 billion cubic feet (Bcf) for the week ended May 12, below the guidance of 106 Bcf addition per a survey conducted by S&P Global Commodity Insights. The increase compared with the five-year (2018-2022) average net injection of 91 Bcf and last year's growth of 87 Bcf for the reported week.
The latest year puts total natural gas stocks at 2,240 Bcf, which is 521 Bcf (30.3%) above the 2022 level at this time and 340 Bcf (17.9%) higher than the five-year average.
The total supply of natural gas averaged 105.2 Bcf per day, down 0.4 Bcf per day on a weekly basis due to a decrease in shipments from Canada, even as dry production stayed unchanged.
Meanwhile, daily consumption deteriorated 1.1% to 89.7 Bcf from 90.7 Bcf in the previous week, mainly reflecting lower residential/commercial demand, which was partly offset by a higher power burn.
Natural Gas Prices Post a Big Gain
Natural gas prices trended significantly upward last week following the smaller-than-expected inventory build. Futures for June delivery ended Friday at $2.59 on the New York Mercantile Exchange, rising 14.1% from the previous week's closing. The jump in natural gas realization is also indicative of signs of curtailment in domestic output though weather predictions called for mild conditions.
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 April 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.
While natural gas has been pushed higher by a brake in upstream activity, bearish weather conditions continue to restrict the commodity from rising further. As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts for benign weather in the days ahead, demand is expected to be modest.
Despite last week's surge, the natural gas market is down more than 42% 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 rather unsure of 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 SilverBow Resources and Cheniere Energy.
SilverBow Resources: SilverBow has operations across roughly 130,000 net acres in the Eagle Ford, and more than 80% 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 .
SilverBow beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters and missed in the other, the average being 62.5%. Valued at around $551.4 million, SBOW has lost 26.6% 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 442.4% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter's 2023 earnings has been revised 100.2% upward over the past 30 days. LNG shares have gained 8.3% in a year.
At the same time, investors might want to sell some bottom-ranked stocks like Comstock Resources CRK.
Comstock Resources: CRK is a leading operator in the Haynesville shale -- a premier natural gas basin -- with 323,000 net acres. About 98% of the company's total output is natural gas.
Comstock Resources has a projected earnings growth rate of -73.5% for the current year. Valued at $2.9 billion, this Zacks Rank #5 (Strong Sell) company's 2023 earnings have been revised 6.6% downward over the past 30 days. CRK shares have lost 33.5% in a year.
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