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

Meanwhile, forecasts for higher weather-related demand and a resurgence of LNG exports represent a few bright spots for the fuel.

Considering that the space remains highly susceptible to unpredictable weather patterns that impact prices and market stability, at this time we advise investors to snap up Buy-rated stocks like Coterra Energy (CTRA Quick QuoteCTRA - Free Report) and hold onto others like 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 32 billion cubic feet (Bcf) for the week ended Jun 28, above the analyst guidance of a 30 Bcf addition. The latest increase puts total natural gas stocks at 3,134 Bcf, 275 Bcf (9.6%) above the 2023 level and 496 Bcf (18.8%) higher than the five-year average.

Natural Gas Prices Finish Significantly Lower

Natural gas prices trended southward last week, following the higher-than-expected inventory build. Futures for August delivery ended Friday at $2.32 on the New York Mercantile Exchange, plunging some 10.8% from the previous week’s closing. Despite this dip, the commodity has been resurgent over the past few months — gaining 47.5% in the second quarter — and wiped out almost all its deficit since the start of this year.

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.

However, both these companies have recently started bringing earlier-deferred production back online following the recovery in prices. It appears that the increased output has put renewed pressure on natural gas prices. This is despite the predictions of hotter-than-normal weather over the coming weeks.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feed gas 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.

While natural gas staged quite the turnaround in a matter of weeks, given the favorable temperature and lower production outlook, it has dropped again as producers plan to bring back those volumes.

Based on these factors, the space is currently quite unpredictable and spooked by sudden changes in weather and production patterns. As such, investors are advised to continue exercising caution, and preferably buy/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 #2 (Buy) company churned out an average of 2,262.7 million cubic feet daily 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 $19.5 billion, CTRA has risen 5.9% 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 Zacks Rank #3 (Hold) natural gas exporter has a trailing four-quarter earnings surprise of roughly 58.9%, on average. LNG shares have moved up 15.2% in a year.