Why Are Natural Gas Prices Low and How Long Will This Last?
Amid all the headlines about the plunge in oil prices, natural gas is struggling with its own set of problems.
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 over growing worries about record output, soaring flaring levels and concerns of an ongoing supply glut.
So far this year, the slide has continued with the price of the volatile energy commodity recently falling to the lowest level in 25 years as it faces the prospect of a coronavirus-related steep drop-off in usage. The fuel was already on the defensive because of mild winter weather (leading to pessimistic heating demand) amid strong production.
Let us see how the natural gas situation looks like after the U.S. Energy Department's latest weekly inventory release:
Inventories Remain Bloated
Stockpiles held in underground storage in the lower 48 states fell by 29 billion cubic feet (Bcf) for the week ended Mar 20, above the guidance (of 27 Bcf fall). However, the decrease was lower than last year’s drop of 39 Bcf and the five-year (2015-2019) average net shrinkage of 40 Bcf for the reported week.
The latest withdrawal puts total natural gas stocks at 2.005 trillion cubic feet (Tcf) - 888 Bcf (79.5%) above 2019 levels at this time and 292 Bcf (17%) over the five-year average.
Fundamentally speaking, total supply of natural gas averaged 98.9 Bcf per day, essentially unchanged on a weekly as dry production remained flat. Daily consumption was also static at 104 Bcf.
Too Many Headwinds Pressure an Already Oversupplied Market
While the novel coronavirus outbreak temporarily boosted natural gas prices on prospects of lower volumes, the rally was short-lived. The fuel initially gained on expectations of a cut in shale oil production that will also limit associated gas output, thereby reducing the massive supply glut.
However, the market soon gave up on the bullish attempt, with pessimism and skepticism taking over. In fact, the commodity traded to the lowest price since September 1995 when it hit $1.53 per MMBtu on Mar 23 before recovering slightly and closing the week at $1.671.
The recent decline in natural gas prices came as analysts and traders factored in worries about the slowdown in demand from the rapidly spreading coronavirus. As economic outlook in the United States darkens with each passing day, residential/commercial and industrial use of natural gas is set to slump markedly. This comes at a time when the commodity has been already struggling with weak consumption because of a warmer-than-expected winter 2019-2020.
As it is, the EIA still expects that the United States will churn out 95.3 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.
More Trouble for Cash-Strapped Gas Stocks
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, SilverBow Resources, Inc. SBOW, Chesapeake Energy Corporation CHK, Cabot Oil & Gas Corporation COG etc. – all carrying a Zacks Rank #3 (Hold) – have fallen somewhere between 35% and 95% over the past 12 months. With the entire industry hit hard, the near-term outlook for gas producers looks bleak even as they slash capital spending on dwindling cash flow.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
But medium-term incentives do remain, with lower ‘associated gas’ — created during oil drilling — potentially draining supply as crude prices collapse.
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Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
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