Here's Why Natural Gas Is on the Verge of Breaking Below $2

The U.S. Energy Department's weekly inventory release showed a larger-than-expected increase in natural gas supplies. The bearish injection, together with an unfavorable weather forecast, sparked a selloff that left the U.S. benchmark with a loss of almost 10% for the week following a 12.3% decline in the previous period. 

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 89 billion cubic feet (Bcf) for the week ended Sep 11, higher than the guidance (of 77 Bcf gain). The increase was also above the five-year (2015-2019) average net addition of 77 Bcf and last year’s build of 82 Bcf for the reported week.

The latest uptick puts total natural gas stocks at 3.614 trillion cubic feet (Tcf) — 535 Bcf (17.4%) above the 2019 levels at this time and 421 Bcf (13.2%) over the five-year average.

Total supply of natural gas averaged 91.7 Bcf per day, down 1.2% on a weekly basis due to decrease in dry production amid disruption in Gulf of Mexico activity from Hurricane Sally.

On the other hand, daily consumption — at 81.1 Bcf — was unchanged from the previous week.

Natural Gas Pullback Continues

The natural gas futures market slumped further following the bigger-than-expected rise in U.S. supplies, with the commodity posting a 9.7% weekly loss. It was the second straight decline of a sizeable proportion, erasing some of the steep gains over the past couple of months associated with warmer weather and higher cooling demand. Futures for October delivery also fell after weather updates showed forecasts of a mild winter that would hamper the demand for natural gas.

The Commodity Flirts With $2 Levels

Natural gas settled at $2.048 per MMBtu on the New York Mercantile Exchange on Sep 18. Despite the sharp declines, the fuel is up nearly 40% since late June when natural gas fell to its lowest level since 1995 due to weak consumption from a warmer-than-expected winter 2019-2020 and a coronavirus-induced drop off in usage. The rebound traces its origins to three factors: a ramp up in air conditioning use on the back of a scorching summer, lower associated gas output tied to the brake in shale oil production growth, and steady improvement in shipments of LNG for export.

However, summer air conditioning use has started to wean with the onset of fall weather. So, demand for natural-gas fired generators is likely to decline in the near term. Going ahead, this could lead to higher injections and subsequent pressure on prices. Weather forecasts predicting a mild winter also pressured natural gas prices.

Investors Need to Tread With Caution

While the future direction of natural gas’ movement is anybody's guess, it might be prudent for investors to maintain caution in these uncertain times and look for fundamentally sound stocks.

We suggest adding SilverBow Resources SBOW to your portfolio. A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused E&P company carrying the coveted Zacks Rank #1 (Strong Buy). SilverBow controls 165,000 net acres in the Eagle Ford and 79% of its total output comprises natural gas.

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

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

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