The U.S. Energy Department's weekly inventory release showed a lower-than-expected increase in natural gas supplies. Following the positive inventory numbers, futures gained nearly 4% week over week. Another factor noted in last week’s spike is the hint of tightening supply.

Despite all this, 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.

As tepid weather-related usage continues to impact the commodity’s consumption, we advise investors to focus on stocks like Chesapeake Energy and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Build Smaller Than Anticipated

Stockpiles held in underground storage in the lower 48 states rose 104 billion cubic feet (Bcf) for the week ended Jun 2, below the guidance of 114 Bcf addition per a survey conducted by S&P Global Commodity Insights. However, the data included the impact of a reclassification of some of the commodity’s supply from working (available in the market) to base, which reduced working gas stocks by 14 Bcf. Excluding the adjustment, the build was 118 Bcf. The addition compared with the five-year (2018-2022) average net injection of 100 Bcf and last year’s growth of 99 Bcf for the reported week.

The latest build puts total natural gas stocks at 2,550 Bcf, which is 562 Bcf (28.3%) above the 2022 level at this time and 353 Bcf (16.1%) higher than the five-year average.

The total supply of natural gas averaged 106.3 Bcf per day, essentially unchanged on a weekly basis as lower dry production was offset by higher shipments from Canada.

Meanwhile, daily consumption rose 3.9% to 92.4 Bcf from 88.9 Bcf in the previous week, mainly reflecting higher power burn that was partly offset by a decline in deliveries to LNG export terminals.

Natural Gas Prices Rise

Natural gas prices trended upward for the first time in three weeks following the lower-than-expected inventory build. Futures for July delivery ended Friday at $2.25 on the New York Mercantile Exchange, rising 3.8%  from the previous week’s closing. The improvement in natural gas realization is also the result of signs of curtailment in domestic output, which more than offset mild weather predictions.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts for benign weather in the days ahead, demand is expected to be modest.

While natural gas has been pushed lower by bearish weather conditions, a projected brake in upstream activity might rescue the commodity from falling further. According to energy services provider Baker Hughes, U.S. natural gas rig count — a pointer to where production is headed — is now at its lowest since April 2022. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies ahead of the impending summer cooling demand.

Meanwhile, 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 Europe’s endeavor to move away from its dependence on Russian natural gas supplies following the war in Ukraine.

Final Thoughts

Despite last week’s advance, the natural gas market is down 50% so far this year. Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production pattern. As such, investors are clueless about 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 Chesapeake Energy and Cheniere Energy.

Chesapeake Energy: Chesapeake has a premier portfolio with more than 15 years of inventory spread over some 2,200 locations, and around 90% 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.

Chesapeake beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 26.6%. Valued at around $10.7 billion, CHK has lost 14.4% 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 452% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 91.9% upward over the past 60 days. LNG shares have gained 15.1% 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 (73.7%) for the current year. Valued at $2.8 billion, this Zacks Rank #5 (Strong Sell) company’s 2023 earnings have been revised 46.2% downward over the past 60 days. CRK shares have lost 45.6% in a year.