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Natural Gas Falls on Weather Woes Even as Surplus Shrinks

The U.S. Energy Department's weekly inventory release showed a smaller-than-expected increase in natural gas supplies following which the commodity traded up. However, worries over the fuel’s tepid demand on the back of bearish weather predictions more than offset the gains and pushed down natural gas prices.

About the Weekly Natural Gas Storage Report

The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data: A Smaller-than-Expected Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 46 billion cubic feet (Bcf) for the week ended June 23, 2017, below the guidance (of 52 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

While the increase was higher than last year’s addition of 41 Bcf, it was under the 5-year (2012-2016) average injection of 72 Bcf for the reported week.

Following past week’s smaller-than-expected climb, the current storage level – at 2.816 trillion cubic feet (Tcf) – is now 319 Bcf (10.2%) lower than the year-ago figure, although stocks are still 181 Bcf (6.9%) above the five-year average.

The bullish inventory numbers spurred a short-lived natural gas rally on Thursday with the commodity rising to $3.11 shortly after the report’s release. However, the electricity generation fuel gave up all its gains later in the day and sold off as investors took note of cooler-than-normal weather predictions (translating into lower heating gas demand) for the week ahead. As a result, natural gas ended Thursday at $3.042 per MMBtu – down 1.7% from Wednesday.

Positive Long-Term Thesis

Despite occasional hiccups, the natural gas demand situation looks promising with hot conditions set to prevail in most U.S. pockets in July and power generators burning more gas to meet intensifying cooling demand.

In any case, long-term fundamentals for the commodity continue to be supportive on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming exports to Mexico, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output. The resulting effect will ensure natural gas storage keeping pace with the 5-year average in the near future, with deficits piling up later on.

Over the summer, these secular tailwinds are likely to have a positive impact on natural gas sentiment and price.

Which Stocks to bet On

The perceived price strength augurs well for natural gas-heavy upstream companies like Rice Energy Inc. RICE, Chesapeake Energy Corp. CHK, Southwestern Energy Co. SWN, WPX Energy Inc. WPX, Cabot Oil & Gas Corp. COG and EQT Corp. EQT.

However, each of these firms has a Zacks Rank #3 (Hold), which means that investors should preferably wait for a better entry point before buying shares in them.

In case you are looking for energy names for your portfolio, one could opt for Canadian Natural Resources Ltd. CNQ. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Calgary, Alberta-based Canadian Natural Resources is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. The 2017 Zacks Consensus Estimate for this company is $1.31, representing some 725% earnings per share growth over 2016. Next year’s average forecast is $2.52, pointing to another 92% growth.

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Southwestern Energy Company (SWN): Free Stock Analysis Report
 
EQT Corporation (EQT): Free Stock Analysis Report
 
Canadian Natural Resources Limited (CNQ): Free Stock Analysis Report
 
Chesapeake Energy Corporation (CHK): Free Stock Analysis Report
 
Cabot Oil & Gas Corporation (COG): Free Stock Analysis Report
 
WPX Energy, Inc. (WPX): Free Stock Analysis Report
 
Rice Energy Inc. (RICE): Free Stock Analysis Report
 
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