The Odds Are Stacked Against Natural Gas Rebound: Here's Why

The U.S. Energy Department's weekly inventory release showed a larger-than-expected decrease in natural gas supplies. However, the positive sentiment was overwhelmed by mild winter weather forecasts amid strong production, which caused prices to stay well under $2. Continued panic over the spreading coronavirus (COVID-19) have also hastened the commodity’s sell-off.

Drawdown Beats Estimates but Storage Remains Bloated

Stockpiles held in underground storage in the lower 48 states fell by 109 billion cubic feet (Bcf) for the week ended Feb 28, above the guidance (of 105 Bcf fall). The decrease was also higher than the five-year (2015-2019) average net shrinkage of 106 Bcf but came below last year’s drop of 152 Bcf for the reported week.

The latest withdrawal puts total natural gas stocks at 2.091 trillion cubic feet (Tcf) - 680 Bcf (48.2%) above 2019 levels at this time and 176 Bcf (9.2%) over the five-year average.

Fundamentally speaking, total supply of natural gas averaged 99.4 Bcf per day, edging down 0.7% on a weekly basis due to lower shipments from Canada even as dry production remained essentially unchanged.

Meanwhile, daily consumption was down 7.1% to 111.2 Bcf compared to 119.7 Bcf in the previous week primarily due to weaker heating demand from the residential/commercial sector.

Production Swamps Market Amid Mild Weather

No major commodity had a worse 2019 than natural gas. The fuel endured a torrid year, registering its worst annual decline since 2014. Prices tumbled more than 25% last year, as buyers fled the market over growing worries about record output and concerns of an ongoing supply glut. Natural gas continues to face bearish pressure in 2020 with warmer-than-expected winter weather playing spoilsport and taking the price below the psychologically important level of $2.

While the pace of shale production growth is slowing, the EIA still expects that the United States will churn out 94.2 billion cubic feet a day (Bcf/d) of dry natural gas this year, up from the 2019 average of 92.1 Bcf/d - a record high for the third consecutive year.

As it is, weather updates showed milder temperatures and pessimistic signs for heating demand over the next few weeks. No wonder, then, that natural gas – at around $1.75 per MMBtu – is down almost 40% from where they were last year. In fact, the commodity recently dropped even further to $1.684 - the lowest level since March 2016.

Gas Stocks Fall with Natural Gas Prices

Natural gas might experience short-lived surge based on positive weather forecasts but any powerful turnaround looks unlikely at the moment. The bearish natural gas fundamentals and its seasonal nature are responsible for the understandable reluctance on investors’ part to dip their feet into these stocks. In fact, most gas-focused names took a pounding during the past year. Shares of EQT Corporation EQT, Gulfport Energy Corporation GPOR, Southwestern Energy Company SWN, Montage Resources Corporation MR, SilverBow Resources, Inc. SBOW Cabot Oil & Gas Corporation COG etc. have fallen somewhere between 40% and 90% over the past 12 months. With the entire industry hit hard, the near-to-medium term outlook for gas producers looks bleak.

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