U.S. Natural Gas: Analysis of the EIA's Weekly Inventory Data

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected decrease in natural gas supplies. The negative inventory numbers, coupled with other factors, meant that futures plunged more than 14% week over week.

Despite this, the market has been kind to natural gas in 2022, with the commodity trading considerably higher year to date and hitting $10 for the first time since 2008. Natural gas stocks like Range Resources RRC, EQT Corporation EQT and Comstock Resources CRK have been some of the prime beneficiaries of the price appreciation.

EIA Reports a Withdrawal Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 81 billion cubic feet (Bcf) for the holiday-shortened week ended Nov 25, below the guidance of 88 Bcf decline per the analysts surveyed by S&P Global Commodity Insights.

However, the decrease was above last year’s pull of 54 Bcf for the same corresponding week and the five-year (2017-2021) average net shrinkage of 34 Bcf.

The second draw of the winter heating season puts total natural gas stocks at 3,483 Bcf, which is 89 Bcf (2.5%) below the 2021 level at this time and 86 Bcf (2.4%) lower than the five-year average.

The total supply of natural gas averaged 106.4 Bcf per day, down 0.6 Bcf per day on a weekly basis due to lower shipments from Canada, partly offset by an increase in dry production.

Meanwhile, daily consumption slumped 13.7% to 108.6 Bcf from 125.9 Bcf in the previous week, mainly reflecting a weaker power burn and decreased residential/commercial demand on the back of above-normal temperatures.

Natural Gas Logs a Big Weekly Loss

Natural gas prices tumbled last week, following the lower-than-expected inventory draw. Futures for January delivery ended Friday at $6.281 on the New York Mercantile Exchange, falling around 14.3% from the previous week’s closing. The decrease in natural gas realization — for the first time in four weeks — is also the result of forecasts for milder weather and the extended shutdown of the Freeport LNG export plant in Texas.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. The latest models anticipate tepid temperature-driven consumption over the near term (with less extensive use of heaters across homes and businesses), which is a negative for prices.

The one thing supporting natural gas is a stable demand catalyst in the form of continued strong LNG feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere.

Now, with the Russia-Ukraine conflict, LNG has become even more coveted. As a matter of fact, earlier this year, the United States entered into a partnership with the EU to export additional LNG to wean the bloc off its dependence on Russian natural gas supplies. This means that LNG deliveries are poised to rise further, especially with squeezed natural gas supplies from Moscow to Europe, following leaks in the key Nord Stream pipeline.

However, the protracted downtime associated with the fire breakout at the Freeport LNG export plant in Texas has drowned out some of the positives as of now. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — was knocked offline by the Jun 8 blast and is expected to only partially restart by the end of December after several missed target dates. Consequently, some of the LNG cargoes due for export are likely to have been diverted to the domestic market despite huge demand abroad.

Final Thoughts

Despite some hiccups in between, the natural gas market is still up almost 70% so far this year. While fundamental indicators continue to suggest strong price levels, the natural gas market is currently quite unpredictable and spooked by the sudden changes in weather. As such, investors are rather unsure of what to do. As of now, the lingering uncertainty over the fuel means that they should preferably opt for fundamentally strong stocks like Range Resources, EQT and Comstock Resources.

Range Resources: The upstream firm has a strong footing in the prolific Appalachian Basin. In the gas-rich resource, RRC has huge inventories of low-risk drilling sites that are likely to provide production for several decades.

Range Resources has a projected earnings growth rate of 151.5% for the current year. Valued at around $6.5 billion, this Zacks Rank #3 (Hold) company reported EPS of $1.37 for the third quarter, reflecting a 0.7% surprise over consensus. RRC shares have climbed 45.2% in a year.

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

EQT: EQT is primarily an explorer and producer of natural gas, with the primary focus on the Appalachian Basin in Ohio, Pennsylvania and West Virginia. In terms of average daily sales volumes, EQT is the largest natural gas producer in the domestic market.

The company has an expected earnings growth rate of 348.9% for the current year. The Zacks Consensus Estimate for EQT’s 2022 earnings has been revised 2.5% upward over the past 90 days. EQT — valued at around $14.7 billion — has soared 104% this year.

Comstock Resources: The company is active in the Haynesville shale in North Louisiana and East Texas — a premier natural gas basin. As of now, CRK has a projected earnings growth rate of 218.1% for the current year.

Comstock Resources, with a market capitalization of $3.9 billion, enjoys a Zacks Value, Growth and Momentum Style Score of A each, and an overall VGM Score of A. CRK shares have surged 117.6% so far this year.

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