The US Department of Energy's weekly inventory release showed natural gas supplies declined less than expected. Despite the bearish inventory figures, futures settled with a slight gain week over week on signs of a decline in production.
Despite this rise, the market has not been kind to natural gas, with the commodity recently hitting nearly four-year lows amid concerns about record production and a growing glut. At this time, we recommend investors focus on stocks such as Coterra Energy CTRA and Cheniere Energy LNG.
EIA reports smaller recall than market expectations
Reserves stored underground in the lower 48 states fell 37 billion cubic feet (Bcf) during the week ending March 29, below guidance for a 39 Bcf draw, according to a survey by S&P Global Commodity Insights. The decline compares to the five-year (2019-2023) average net contraction of 1 Bcf and last year's decline of 29 Bcf for the reported week.
The latest draw places total natural gas reserves at 2,259 Bcf, which is 422 Bcf (23%) above the 2023 level and 633 Bcf (38.9%) above the five-year average.
Total natural gas supply averaged 105.6 Bcf per day, down 0.2 Bcf per day weekly due to a drop in dry production, partially offset by higher shipments from Canada.
Meanwhile, daily consumption fell to 105.2 Bcf from 114 Bcf in the previous week, primarily reflecting a sizeable drop in residential/commercial usage caused by reduced heating demand in warmer weather.
Natural gas prices still end up higher
Natural gas prices trended north last week despite a smaller-than-expected inventory decline. Futures for May delivery ended Friday at $1.785 on the New York Mercantile Exchange, up about 1.3% from the previous week's close. The increase in natural gas production is the result of a decline in supply. However, fuel is down almost 30% this year after falling 44% in 2023.
Investors should be aware that natural gas production has been under pressure from strong production, high reserves and tepid weather-related demand. It is worth mentioning that current inventory levels are well above last year's figure and the five-year average. The bearish sentiment surrounding the commodity even boosted shale producers. Chesapeake Energy CHK and EQT Corporation EQT to stop new drilling.
Chesapeake announced a reduction of its drilling rigs to reduce volume. The company has decided to cut gas production expectations for this year by approximately 20%. Chesapeake's plans spread across the market, followed by EQT, focused on the Appalachian Basin. The natural gas explorer and producer said it will reduce its daily production by 1 Bcf to combat excess supply in the US market. According to EQT, the revised plan will likely reduce net production by 30 to 40 Bcf. While these production cut announcements temporarily raised natural gas prices, they have failed to galvanize the market.
As is usual with natural gas, changes in temperature and weather can cause price swings. With low demand for heating this winter and increasingly mild forecasts, use of the commodity to generate electricity has been affected.
That said, there are signs of slowing US production. According to energy services provider Baker Hughes, the number of natural gas rigs in the US, an indicator of where production is headed, is down about 30% from last year to its lowest level since January 2022. Industry observers believe this could set the stage for a short-term pullback in drilling and supplies.
Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. In fact, LNG export shipments from the United States have been rising for months, reaching record levels due to environmental reasons and Europe's effort to move away from its dependence on Russian natural gas supplies due to the war in Ukraine.
At the same time, the prolonged downtime associated with testing and repairs at Freeport LNG's export plant in Texas has drowned out some of the positives so far. The Quintana, Texas, facility, responsible for about 15% of U.S. liquefaction capacity, faces disruptions to two of its three liquefaction trains through May. Consequently, some of the LNG cargoes that were due to be exported are likely to have been diverted to the domestic market despite huge demand abroad.
Final thoughts
The result of all these factors – the natural gas market – continues to be excess supply. As mentioned above, it endured a torrid year in 2023, briefly breaking below the $2 threshold for the first time since 2020. The situation is not much different in 2024, with fuel hitting a multi-year low near 1.48 dollars at the end of March and fighting. to cross the psychological mark of 2 dollars.
Due to several factors, the space is currently quite unpredictable and spooked by sudden changes in weather and production patterns. As such, investors have no idea what to do. As of now, persistent fuel uncertainty means they should preferably hold on to fundamentally strong stocks like Coterra Energy and Cheniere Energy.
Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, Texas, the company owns approximately 183,000 net acres in the Marcellus Shale, a gas-producing area of the Appalachian Basin. This Zacks Rank #3 (Hold) company produced an average of 2,262.7 million cubic feet per day from these assets in 2023.
Coterra surpassed the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed the other, the average being 9.3%. Valued at around $21.3 billion, CTRA is up 10.4% in a year.
Cheniere Energy: As the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy enjoys a clear competitive advantage.
Cheniere Energy surpassed the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed the other. This No. 3 natural gas exporter has a trailing four-quarter earnings surprise of about 64.7%, on average. LNG shares are up 2.1% in a year.
