Here's Why Natural Gas Is on the Verge of Breaking Above $3

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies. Following this bullish injection, the U.S. benchmark gained 1.2% last week and is up almost 100% since its June lows. 

Let us see how the natural gas situation looks like after the U.S. Energy Department's latest weekly inventory release:

A Look Inside the Latest Available EIA Data

Stockpiles held in underground storage in the lower 48 states rose by 46 billion cubic feet (Bcf) for the week ended Oct 9, lower than the guidance (of 60 Bcf gain). The increase was also below the five-year (2015-2019) average net addition of 87 Bcf and last year’s build of 102 Bcf for the reported week.

The latest uptick puts total natural gas stocks at 3.877 trillion cubic feet (Tcf) — 388 Bcf (11.1%) above the 2019 levels at this time and 353 Bcf (10%) higher than the five-year average.

Total supply of natural gas averaged 89.9 Bcf per day, down 1.7% on a weekly basis due to a decrease in dry production and lower shipments from Canada.

Daily consumption fell too — by 3.2% to 81.2 Bcf — primarily due to weaker demand from the residential/commercial and industrial sectors on warmer weather.  

Natural Gas Price Rebounds Significantly Since Late June

The natural gas futures market inched up following the smaller-than-expected rise in U.S. supplies, with the commodity posting a 1.2% weekly gain. It added another 0.8% yesterday, settling at $2.795 per MMBtu on the New York Mercantile Exchange.

Already on the back of several tailwinds and supported by the impending winter demand, natural gas prices have nearly doubled since late June. With the commodity being the primary U.S. power plant fuel, firms in natural gas business are set to gain from the bump in temperature-driven demand.

Weather & Other Catalysts

Riding on this positive momentum, prices reached a 19-month high of $2.881 per MMBtu in the course of last week. Prices have also got a lift from the disruptions to the Gulf of Mexico production from Hurricane Delta – the latest in a record-breaking year of storms to hit mainland United States.

Lower year-over-year domestic production and higher LNG prices in Asia and Europe — America’s chief export markets — and an active hurricane season have also contributed to natural gas’ recent strength.

In particular, the novel coronavirus outbreak remains a big catalyst for balancing the natural gas market. Analysts believe that the brake in skyrocketing shale oil production growth — tied to the crude price collapse — will also limit the associated gas output, thereby cutting the massive supply glut. As proof of the supply drop, natural gas production continues to be curtailed, with domestic volumes receding more than 7% year over year. So, we will have a tighter market going into 2021. In fact, the EIA forecasts an average price of $3.13 per MMBtu over the course of 2021, up significantly from this year’s projection of $2.07 per MMBtu.

Meanwhile, the recovering international LNG prices mean that overseas shipments have become profitable again. This should not only help relieve domestic exporters but also act as a bullish demand factor for U.S. natural gas prices.

Finally, periodic production shut-ins in the Gulf of Mexico because of frequent tropical storms are also responsible for the rise in prices.

Are There Any Stocks to Buy?

We suggest adding Range Resources Corporation RRC to your portfolio. The company, carrying a Zacks Rank #1 (Strong Buy), has a strong footing in the prolific Appalachian Basin.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the gas-rich resource, the upstream firm has huge inventories of low-risk drilling sites that are likely to provide production for several decades. About 70% of the company’s total output is natural gas. The stock has soared 58.5% over the past six months.

Then there is Gulfport Energy Corporation GPOR. The company's asset base — primarily focused on natural gas — is concentrated on the Utica Shale of Ohio and the SCOOP play in Oklahoma.

Gulfport has a combined inventory in excess of 3,000 gross drilling locations in its two primary plays. Of Gulfport’s total output, nearly 90% comprises natural gas. Robust execution and strong performance should aid Gulfport’s performance going forward. The Zacks Rank #2 (Buy) stock has lost 14.8% over the past six months.

Meanwhile, there are Zacks Rank #3 (Hold) natural gas stocks like Cabot Oil & Gas COG, Comstock Resources CRK and CNX Resources CNX that investors may currently retain in their portfolio.

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Comstock Resources, Inc. (CRK): Free Stock Analysis Report
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Range Resources Corporation (RRC): Free Stock Analysis Report
Gulfport Energy Corporation (GPOR): Free Stock Analysis Report
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