The U.S. Energy Department's weekly inventory release showed that natural gas supplies increased more than expected. The bearish inventory numbers affected natural gas futures, which settled with a small loss week over week.

However, signs of production pullback, resurgence of LNG exports and heatwave-related summer demand are set to support near-term prices. The commodity is already on an upswing, gaining some 30% in May — its best monthly performance since July 2022 — driven by an improved macro backdrop.

Considering that the space remains highly susceptible to unpredictable weather patterns that impact prices and market stability, at this time we advise investors to focus on stocks like Coterra Energy (CTRA Quick QuoteCTRA - Free Report) and Cheniere Energy (LNG Quick QuoteLNG - Free Report) .

EIA Reports a Build Slightly Larger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 74 billion cubic feet (Bcf) for the week ended Jun 7, just above the analyst guidance of a 73 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 89 Bcf and last year’s growth of 90 Bcf for the reported week.

The latest increase puts total natural gas stocks at 2,974 Bcf, which is 364 Bcf (13.9%) above the 2023 level and 573 Bcf (23.9%) higher than the five-year average.

The total supply of natural gas averaged 105.2 Bcf per day, up 0.1 Bcf per day on a weekly basis, due to higher shipments from Canada, almost offset by a pullback in dry production.

Meanwhile, daily consumption rose to 97.1 Bcf from 96.1 Bcf in the previous week, primarily on the back of higher consumption for power generation.

Natural Gas Prices Finish Lower

Natural gas prices trended southward last week following the higher-than-expected inventory build. Futures for July delivery ended Friday at $2.881 on the New York Mercantile Exchange, down some 1.3% from the previous week’s closing. Despite this dip, the commodity has been resurgent over the past couple of months — gaining 13% in April, followed by 30% in May — and wiped out all its deficit since the start of this year to be up nearly 15% in 2024.

Investors should know that natural gas realization has been under pressure from strong production, elevated stockpiles and tepid weather-related demand. It's worth mentioning that the current inventory levels are well above the year-ago figure and the five-year average. The bearish sentiment surrounding the commodity even prompted shale producers Chesapeake Energy (CHK Quick QuoteCHK - Free Report) and EQT Corporation (EQT Quick QuoteEQT - Free Report) to hit the brakes on new drilling.

Chesapeake announced a reduction in its drilling rigs to lower volume, with the Appalachian Basin-focused EQT following on. CHK has decided to curb the second quarter’s gas production expectations by 400 million cubic feet per day (MMcf/d), doubling the previous curtailment announced in March. Separately, EQT — the largest domestic producer of natural gas — said that it will lower its daily output by 1 Bcf through May to combat the supply glut in the U.S. market.

According to EQT, the revised plan will likely reduce full-year sales volume to 2,100-2,200 billion cubic feet equivalent (Bcfe) from 2,200-2,300 Bcfe earlier. It appears that these production cut announcements have been partly responsible for driving natural gas prices higher and galvanizing the market.

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With low heating demand this winter, usage of the commodity to generate electricity took a hit. However, predictions of an impending heat wave in the near future should boost demand.

Moreover, there are signs of curtailment in U.S. production. 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 to its lowest level since October 2021. Industry observers believe that 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. LNG shipments for export from the United States have been elevated of late due to environmental reasons and Europe’s endeavor to move away from its dependence on Russian natural gas supplies due to the war in Ukraine. At the same time, the increase in gas flows due to the full restart of the Freeport LNG export plant in Texas has translated into more of the commodity being loaded onto ships. A heatwave blanketing Southeast Asia has also led to a jump in power demand for air conditioning, increasing exports of the super-chilled fuel.

Final Thoughts

The upshot of all these factors — the natural gas market — despite improving, remains an oversupplied one. It endured a torrid 2023, briefly breaking below the $2 threshold for the first time since 2020. The situation was not much different in early 2024, with the fuel reaching a multi-year low near $1.48 in late March and struggling to sustain a rally over the psychological mark of $2.

However, natural gas has staged quite the turnaround in a matter of weeks and looks to improve even further, given the favorable temperature and lower production outlook. While that’s not to say there won’t be some hiccups along the way, things are starting to look up for the sector.

Nevertheless, based on several factors, the space is currently quite unpredictable and spooked by sudden changes in weather and production patterns. As such, investors are advised to still exercise caution, and preferably hold on to fundamentally strong stocks like Coterra Energy and Cheniere Energy.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This Zacks Rank #3 (Hold) company churned out an average of 2,262.7 million cubic feet on a daily basis from these assets in 2023.

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

Coterra beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters and missed in the other, the average being 9.8%. Valued at around $19.9 billion, CTRA has risen 9.3% 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 enjoys a distinct competitive advantage.

Cheniere Energy beat the Zacks Consensus Estimate for earnings in two of the last four quarters and missed in the other two. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 58.9%, on average. LNG shares have moved up 5.9% in a year.