The U.S. Energy Department's weekly inventory release showed a higher-than-expected increase in natural gas supplies. The negative inventory numbers notwithstanding, futures settled with a gain week over week, buoyed by a hint of tightening supply and predictions of strong cooling demand.  

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. At this time, we advise investors to focus on stocks like Chesapeake Energy , Coterra Energy (CTRA Quick QuoteCTRA - Free Report) and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Larger-Than-Anticipated Build

Stockpiles held in underground storage in the lower 48 states rose 57 billion cubic feet (Bcf) for the week ended Sep 8, above the guidance of a 49 Bcf addition per a survey conducted by S&P Global Commodity Insights. The build compared with the five-year (2018-2022) average net injection of 76 Bcf and last year’s growth of 74 Bcf for the reported week.

The latest increase puts total natural gas stocks at 3,205 Bcf, which is 445 Bcf (16.1%) above the 2022 level at this time and 203 Bcf (6.8%) higher than the five-year average.

The total supply of natural gas averaged 107.3 Bcf per day, down 0.6 Bcf per day on a weekly basis due to a decrease in dry production and lower shipments from Canada.

Meanwhile, daily consumption fell 1% to 97.8 Bcf from 98.8 Bcf the previous week, mainly reflecting a drop in deliveries to LNG export terminals.

Natural Gas Prices Still Record an Increase

Natural gas prices trended upward last week despite the higher-than-expected inventory build. Futures for October delivery ended Friday at $2.64 on the New York Mercantile Exchange, rising 1.5% from the previous week’s closing. The increase in natural gas realization is the result of favorable weather predictions and signs of curtailment in domestic output.

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. With forecasts for above-normal heat in the days ahead, usage of the commodity to generate electricity to meet cooling demand is expected to be strong.

Apart from bullish weather conditions, natural gas has been pushed higher by a projected brake in upstream activity. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down around 25% from last year. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. While falling from their April highs, 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.

Furthermore, while there is a threat to global supplies from a workers strike at two massive LNG facilities in Australia, the disruption is unlikely to have a major effect on U.S. natural gas prices with most buyers already hedging their contracts through replacement cargoes from other export facilities. 

Final Thoughts

Despite last week’s increase, the natural gas market is down 41% so far this year. Based on several factors, the space is currently quite unpredictable and spooked by the sudden changes in weather and production patterns. 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, Coterra 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. This 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 (Strong Buy) stocks here.

Chesapeake beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 23.7%. Valued at around $11.3 billion, CHK has lost 16.4% in a year.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, this Zacks #3 Ranked firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. The company churned out an average 2,204 million cubic feet on a daily basis from these assets in 2022.

Coterra beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 9.5%. Valued at around $21.1 billion, CTRA has lost 3.5% 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 494.9% for the current year. The Zacks Consensus Estimate for this #3 Ranked natural gas exporter’s 2023 earnings has been revised 8.3% upward over the past 60 days. LNG shares have gone down 3% in a year.