Natural Gas Supply Deficit Falls On Below-Average Drawdown

The U.S. Energy Department's weekly inventory release showed a bigger-than-expected decrease in natural gas supplies. While prices jumped following the storage withdrawal, the drawdown was well below average, which further reduced the storage deficit.

Mixed EIA Inventory Data

Stockpiles held in underground storage in the lower 48 states fell by 81 billion cubic feet (Bcf) for the week ended Jan 11, above the guidance (of 77 Bcf decline) as per the analysts surveyed by S&P Global (NYSE:SPGI) Platts. However, the decrease was significantly lower than both the five-year (2014-2018) average net shrinkage of 218 Bcf and last year’s drop of 208 Bcf for the reported week.

Following past week’s supply decline, at 2.533 trillion cubic feet (Tcf), natural gas inventories are 327 Bcf (11.4%) under the five-year average and 77 Bcf (3%) below the year-ago figure.

Fundamentally speaking, total supply of natural gas averaged around 94.4 Bcf per day, up 1% on a weekly basis as dry production edged up. Meanwhile, daily consumption rose 18% to 97.2 Bcf thanks to stronger power generation and residential sector demand amid colder weather.

Wild Ride for the Heating Fuel

While natural gas has rallied around 20% over the past fortnight, it’s still 30% below the four-year high of $4.929 per MMBtu reached in mid-November. The early onset of winter, together with the lowest level of stocks in 15 years and demand from power plants and growing LNG shipments lifted the commodity to its highest level since November 2014.

But the euphoria didn’t last long as mild weather in December and early January led to smaller withdrawals that markedly reduced the storage deficit and sent prices lower.

What Lies Ahead?

The fundamentals of natural gas consumption continue to be favorable. 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 explosive growth through 2020 means that supply will keep pace with demand. Therefore, prices are likely to trade sideways unless colder-than-normal weather returns during the rest of the winter.

Want to Own a Natural Gas Stock Now?

The uncertain natural gas fundamentals (considering 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 (NASDAQ:GPOR) , Antero Resources (NYSE:AR) , SilverBow Resources, Inc. (NYSE:SBOW) , Chesapeake Energy Corporation (NYSE:CHK) and Southwestern Energy Company (NYSE:SWN) carry a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.

if you are looking for a near-term natural gas play, QEP Resources Inc. (NYSE:QEP) might be a good selection. The company has a Zacks Rank #2 (Buy).

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Written By: Zacks Investment Research