The U.S. Energy Department’s recent weekly inventory release indicates a smaller-than-expected increase in natural gas supplies.
This report, coupled with production pullbacks and anticipated summer demand, has positively influenced natural gas futures, which saw a significant gain week over week, hitting their highest level since January.
Inventory and Supply Details
- Weekly Increase: 70 Bcf, below the expected 76 Bcf.
- Comparisons:
- Five-year average: 90 Bcf.
- Last year’s same week: 93 Bcf.
- Total Stocks: 2,633 Bcf, 421 Bcf (19%) above 2023 levels, and 620 Bcf (30.8%) higher than the five-year average.
- Supply: Averaged 104.5 Bcf per day, with higher dry production offsetting lower Canadian shipments.
- Consumption: Fell to 94.5 Bcf from 95.5 Bcf the previous week, mainly due to reduced power generation usage.
Market Response and Price Trends
Natural gas prices surged following the lower-than-expected inventory build, with futures for June delivery closing at $2.49 on the New York Mercantile Exchange, marking a 16.6% increase from the previous week. This recent uptrend has reversed all losses incurred since the start of the year.
Production Adjustments
Despite the recent price spike, the natural gas market remains oversupplied, pressured by robust production and high inventory levels. Shale producers like Chesapeake Energy (NASDAQ:CHK) and EQT Corporation (NYSE:EQT) have announced reductions in new drilling to address the supply glut.
- Chesapeake Energy: Plans to reduce second quarter gas production by 400 MMcf/d.
- EQT Corporation: Lowering daily output by 1 Bcf through May, which will likely reduce their full-year sales volume.
Weather and Demand Influences
Natural gas prices are particularly sensitive to weather changes. Mild winter heating demand has impacted electricity generation usage. However, forecasts of warmer-than-normal weather across the U.S. are expected to boost demand.
LNG Exports and Global Factors
Strong LNG feedgas deliveries and increased export activities have supported natural gas demand. The U.S. LNG export volumes remain high due to environmental concerns and Europe’s shift away from Russian gas. The full restart of the Freeport LNG plant in Texas has also contributed to increased gas flows.
Investment Recommendations
Given the current market conditions, investors are advised to focus on strong stocks like Coterra Energy (NYSE:CTRA) and Cheniere Energy (NYSE:LNG).
- Coterra Energy: An independent upstream operator focused on natural gas exploration and production, mainly in the Marcellus Shale. With a market value of around $21 billion, Coterra has shown consistent earnings performance and stock growth.
- Cheniere Energy: A leading LNG exporter with significant competitive advantages. Despite mixed earnings results, Cheniere’s shares have shown a notable increase over the past year.
Conclusion
While the natural gas market has shown improvement, it remains volatile and influenced by weather and production trends. Investors should exercise caution and consider holding fundamentally strong stocks like Coterra Energy and Cheniere Energy to navigate the unpredictable market landscape effectively.
