The U.S. Energy Department's weekly inventory release showed that natural gas supplies increased less than expected. The bullish inventory numbers buoyed natural gas futures, which settled with a healthy gain week over week.  

Despite this spike, the commodity is currently trading around the lowly $2 level in the face of certain headwinds. Considering that the space remains highly susceptible to unpredictable temperature patterns that impact prices and market stability, at this time, we advise investors to focus on stocks like Range Resources (RRC Quick QuoteRRC - Free Report) and Antero Resources (AR Quick QuoteAR - Free Report) .

EIA Reports a Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 35 billion cubic feet (Bcf) for the week ended Aug. 23, slightly below analysts’ guidance of a 36 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 43 Bcf and last year’s growth of 28 Bcf for the reported week.

The weekly build puts total natural gas stocks at 3,334 Bcf, which is 228 Bcf (7.3%) above the 2023 level and 361 Bcf (12.1%) higher than the five-year average.

The total supply of natural gas averaged 109 Bcf per day, up 1. 2 Bcf per day on a weekly basis, due to higher shipments from Canada and rising dry production.

Meanwhile, daily consumption remained essentially unchanged from the previous week at 100.3 Bcf.

Natural Gas Prices Finish Higher

Natural gas prices trended northward last week following the lower-than-expected inventory build. Futures for October delivery ended Friday at $2.13 on the New York Mercantile Exchange, up 5.4% from the previous week’s closing. However, one should not forget that the commodity has plunged more than 30% over the past two-and-a-half months after climbing some 47% in April and May. It fell to a four-month low of $1.880 on Wednesday.

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 has prompted producers APA Corporation (APA Quick QuoteAPA - Free Report) and EQT Corporation (EQT Quick QuoteEQT - Free Report) to hit the brakes on new drilling.

APA expects to curtain natural gas output by 90 million cubic feet per day (MMcf/d) in the third quarter after lowering its second-quarter volumes by 78 MMcf/d to combat depressed realizations. Separately, the Appalachian Basin-focused EQT — the largest domestic producer of natural gas — said that it would continue to cut daily production by about 0.5 Bcf through the second half of this year.

Interestingly, some of these companies had just started bringing earlier-deferred production back online following the recovery in prices during the April-May period. It appears that the increased output put renewed pressure on natural gas prices.

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. The global LNG market is gearing up for a potentially robust winter season extending into early 2025, driven by bullish indicators from the waterborne cargo market and heightened vulnerability to supply-side disruptions.

Final Thoughts

The natural gas market remains oversupplied, grappling with the aftermath of a challenging 2023 when it briefly dipped below $2 for the first time since 2020. This year, the fuel hit a multi-year low of $1.48 in March, struggling to stay above the $2 mark.

Although natural gas saw a brief rally, thanks to favorable weather and a dip in production, prices have dropped again, forcing producers to cut volumes further. Recent forecasts for moderate weather have sparked fresh worries over demand.

Given these unpredictable shifts, the market remains volatile and sensitive to sudden changes in weather and production patterns. Investors are advised to remain cautious and consider holding fundamentally strong stocks like Range Resources and Antero Resources.

Range Resources: The company is an U.S. independent natural gas producer with operations focused in the Appalachian Basin. Range Resources’ large contiguous acreage position provides more than 30 years of low-breakeven, high-return inventory. This Zacks Rank #3 (Hold) company produced an average of 2,152.9 million cubic feet equivalent daily from these assets in the second quarter of 2024 – 69% natural gas.

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

Range Resources beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 31.6%. Valued at around $7.2 billion, RRC has fallen 10.4% in a year.

Antero Resources: It is one of the leading natural gas producers in the United States. Antero Resources has more than two decades of premium low-cost drilling inventory in the prolific Appalachian Basin, indicating a strong production outlook. AR churned out 311 billion cubic feet equivalent (Bcfe) in the most recent quarter, of which more than 60% was natural gas.

Antero Resources beat the Zacks Consensus Estimate for earnings in two of the last four quarters, met once and missed in the other. This #3 Ranked natural gas exporter has a trailing four-quarter earnings surprise of roughly 18.8%, on average. AR shares have moved down 4.2% in a year.