The U.S. Energy Department's weekly inventory release showed a bigger-than-expected increase in natural gas supplies. Despite the negative inventory numbers, futures rose more than 5% week over week, overwhelmed by unseasonal cold weather in certain swathes of the country.

Notwithstanding last week’s movement, a string of bearish factors continues to surround the commodity. In fact, the market hasn't been kind to natural gas in 2023, with the commodity trading considerably lower year to date and briefly breaking below the $2 threshold for the first time since 2020.

While macro challenges are leading to some concerns, we advise investors to focus on stocks like SilverBow Resources and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Build Larger Than Anticipated

Stockpiles held in underground storage in the lower 48 states rose 25 billion cubic feet (Bcf) for the week ended Apr 7, above the guidance of 20 Bcf addition. The increase compared with the five-year (2018-2022) average net injection of 28 Bcf and last year’s growth of 8 Bcf for the reported week.

The first build of the year puts total natural gas stocks at 1,855 Bcf, which is 460 Bcf (33%) above the 2022 level at this time and 295 Bcf (18.9%) higher than the five-year average.

The total supply of natural gas averaged 105.3 Bcf per day, up 0.3 Bcf per day on a weekly basis due to slight increases in dry production shipments from Canada.

Meanwhile, daily consumption deteriorated 4.6% to 95.2 Bcf from 99.8 Bcf in the previous week, mainly reflecting lower residential/commercial demand.

Natural Gas Prices Post a Gain

Natural gas prices trended upward last week despite the larger-than-expected inventory build. Futures for May delivery ended Friday at $2.114 on the New York Mercantile Exchange, rising around 5.3% from the previous week’s closing. The increase in natural gas realization is the result of unseasonable cool weather across certain regions.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. Despite last week’s surprise cold bout, mild spring weather is set to take hold in the days ahead, which would translate into bigger inventory additions due to tepid requirements for heating and cooling. Therefore, prices are likely to be impacted adversely. Compounding the matter, daily production has hovered around the record 100 Bcf mark due to a relatively mild winter, and this has pushed stocks significantly above historical levels.

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

Now, with the Russia-Ukraine conflict dragging on, LNG has become even more coveted. As a matter of fact, last 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 remain robust, especially with squeezed natural gas supplies from Moscow to Europe, following a shutdown in the Nord Stream pipeline from last August.

Finally, the return of the Freeport LNG export plant in Texas to full capacity will lead to more gas flowing overseas. The Quintana, TX facility — responsible for around 15% of U.S. liquefaction capacity — was knocked offline by a blast in June last year and was only partially functional until recently.

Final Thoughts

Based on several factors, the natural gas market is down some 53% so far this year. As a matter of fact, the space 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 holding on to fundamentally strong stocks like SilverBow Resources and Cheniere Energy.

SilverBow Resources: SilverBow has operations across roughly 130,000 net acres in the Eagle Ford, and more than 80% of its total output comprises natural gas. The Zacks Rank #3 (Hold) company’s exposure to premium markets and focus on costs and margins should help it to benefit from any increase in natural gas prices.

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

SilverBow beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 80.8%. Valued at around $569.8 million, SBOW has lost 36.2% in a year.

Cheniere Energy: Being the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy certainly enjoys a distinct competitive advantage.

Cheniere Energy has a projected earnings growth rate of 187.6% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 8.7% upward over the past 60 days. LNG shares have gained 7.8% in a year.

At the same time, investors might want to sell some bottom-ranked stocks like Comstock Resources (CRK Quick QuoteCRK - Free Report) .  

Comstock Resources: CRK is a leading operator in the Haynesville shale — a premier natural gas basin — with 323,000 net acres. About 98% of the company’s total output is natural gas.

Comstock Resources has a projected earnings growth rate of -59.5% for the current year. Valued at around $3.1 billion, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 49.5% downward over the past 60 days. CRK shares have lost 38.9% this year.