The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. However, the injection was higher than the five-year average and the year-ago rise. Therefore, despite a slight recovery, natural gas prices remained close to the lowest levels in more than three years because of growing fears that soaring production is outpacing demand growth.
Analysis: Less-Than-Expected Rise in Storage
Stockpiles held in underground storage in the lower 48 states rose by 98 billion cubic feet (Bcf) for the week ended Jun 21, below the guidance (of 100 Bcf gain) as per the analysts surveyed by S&P Global Platts. However, the increase was higher than the five-year (2014-2018) average net injection of 70 Bcf and last year's increase of 71 Bcf for the reported week.
The latest rise in inventories puts total natural gas stocks at 2.301 trillion cubic feet (Tcf) - 236 Bcf (11.4%) above 2018 levels at this time but 171 Bcf (6.9%) under the five-year average.
Fundamentally speaking, total supply of natural gas averaged 94.2 Bcf per day, essentially unchanged on a weekly basis. While dry production inched up to 89.6 Bcf per day from 89 Bcf per day, 2% less gas flowed into the country from Canada.
Meanwhile, daily consumption was up 3.3% to 84.1 Bcf compared to 81.4 Bcf in the previous week primarily due to strong power sector demand amid warmer weather across the Southeast region.
Prices Recover Somewhat
The slightly smaller-than-expected climb in U.S. supplies drove a 5.6% weekly gain for natural gas - the best week since January - erasing some of the steep losses that have taken the commodity to lows not seen since May 2016. Still, natural gas - at $2.308 per MMBtu - is far off the $3.722 per MMBtu 2019-high reached in January. Last week, the fuel hit a more than three-year low of $2.185.
Natural Gas to Trade at Low Levels in the Near Term
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 but for weather-driven movements.
Natural gas prices might experience short-lived surge based on positive weather forecasts 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 over the next few days.
Buy the Dip?
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 , Antero Resources AR , Cabot Oil & Gas Corporation COG , SilverBow Resources, Inc. SBOW , 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 are further down the pecking order, with Zacks Rank #4 (Sell).
If you are looking for near-term natural gas play, Montage Resources Corporation MR 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 .
Over 30 days, the Irving, TX-based company has seen the Zacks Consensus Estimate for 2019 earnings per share increase 12.3% to $2.01.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Southwestern Energy Company (SWN): Free Stock Analysis Report Eclipse Resources Corporation (MR): Free Stock Analysis Report Gulfport Energy Corporation (GPOR): Free Stock Analysis Report Cabot Oil & Gas Corporation (COG): Free Stock Analysis Report Antero Resources Corporation (AR): Free Stock Analysis Report Ultra Petroleum Corp. (UPL): Free Stock Analysis Report SilverBow Resources Inc. (SBOW): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research