The U.S. Energy Departments weekly inventory release showed a higher-than-expected increase in natural gas supplies. Despite the bearish numbers, the prospect of more weather-related consumption and supply bottleneck due to logistical constraints in an Appalachia pipeline meant that the U.S. benchmark gained 6.4% last week to reach its highest level in more than seven months.
Let us see what the natural gas situation looks like after the U.S. Energy Departments latest weekly inventory release:
EIA Reports a Build Bigger Than Market Expectations
Stockpiles held in underground storage in the lower 48 states rose by 98 billion cubic feet (Bcf) for the week ended Jun 4 compared to the guidance of a 95 Bcf addition. The increase was also above last year’s addition of 95 Bcf for the same corresponding week and the five-year (2016-2020) average net build of 92 Bcf.
The latest injection puts total natural gas stocks at 2,411 billion cubic feet (Bcf), which is 383 Bcf (13.7%) below the 2020 levels at this time and 55 Bcf (2.2%) lower than the five-year average.
Total supply of natural gas averaged 98 Bcf per day, up 1.1% on a weekly basis due to an increase in dry production and higher shipments from Canada.
Meanwhile, daily consumption rose 3% to 86.6 Bcf from 84.1 Bcf in the previous week, primarily buoyed by higher power burn (or cooling demand) on the back of warmer-than-expected weather in the midwestern and eastern United States.
Natural Gas Price Consolidates Above $3
Natural gas prices trended upward last week despite the higher-than-expected inventory build. Futures for July delivery ended Friday at around $3.30 per million British thermal units (MMBtu) on the New York Mercantile Exchange, rising 6.4% from the previous week’s closing and the highest since Oct 30. The increase in the price of natural gas is the result of warmer weather predictions in the United States for the days ahead, which would translate into robust demand for the fuel. Concerns about a prolonged supply disruption in Enbridge’s ENB Tetco pipeline system unit due to lower pressure — which reduced the amount of gas flowing from Appalachia to the Midwest and Gulf Coast — also offered support.
As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models are anticipating higher temperature-driven consumption, after which prices have gone up.
While the prospect of early summer demand growth is likely to drive U.S. natural gas futures higher, the bulls are facing pressure from the increase in production, which is currently at its highest weekly average since March 2020.
As mentioned above, worries regarding a protracted supply cut at an important natural gas pipeline also aided prices. Nevertheless, it will be weather conditions across the United States that will primarily dictate the energy commodity’s future.
Therefore, in the coming weeks, natural gas prices would be mostly determined by temperature levels — whether they are lower or higher than average. The heightened uncertainty over the fuel means that most natural-gas-focused companies carry a Zacks Rank #3 (Hold). As a result, investors should preferably wait for a better entry point before buying shares in EQT Corporation EQT, Range Resources RRC, Comstock Resources CRK, Southwestern Energy Company SWN, Cabot Oil & Gas Corporation COG etc.
If you are still looking for near-term natural gas plays, SilverBow Resources SBOW might be an excellent selection.
A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused exploration and production company. Over 60 days, the Zacks Rank #1 (Strong Buy) company has seen the Zacks Consensus Estimate for 2021 increase 39.3%. SilverBow controls 165,000 net acres in the Eagle Ford and around 80% of its total output comprises natural gas.
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