Over the past few weeks, natural gas prices have risen to levels not seen in almost four months, reflecting a steady, albeit slow, ascent, after being range bound since late January. A confluence of factors could fuel the commodity's march to the psychologically important $3 level this summer.
Here are at least four key reasons for the nascent rally to continue:
Record Summer Heat: With record high temperatures heating up the Memorial Day weekend, the summer injection season (April to October) – following a late-ending winter – is turning out to be scorching across major U.S. pockets. Consequently, demand for natural gas to fire power plants for running air conditioners is expected to be fairly strong. The stellar power burn demand could then lead to decreasing storage builds. In fact, certain projections show summer cooling demand to reach all-time highs this year thus contributing to more cooling degree days (CDD). Ultimately, the heightened demand for cooling fuel will put upward pressure on prices.
Relatively Flat Production: It's a fact that dry natural gas production in the United States increased significantly over the past decade and at around 80 Bcf/day is currently 12% above last year. However, investors must note that the commodity's average output in 2017 was 73.6 Bcf/d, up a marginal 1% from the 2016 level but below the previous highs set in 2015. In other words, the three-year period of 2015 to 2017 saw flat production.
Healthy Storage Dynamics: The year-on-year comparison for the commodity is looking good. As per EIA's latest 'Weekly Natural Gas Storage Report', stockpiles held in underground storage in the lower 48 states was 1.629 trillion cubic feet (Tcf). This is 499 Bcf (23.4%) under the five-year average and 804 Bcf (33%) below the year-ago figure.
Rising Exports: New pipelines to Mexico and the startup of the Sabine Pass LNG terminal in Louisiana – North America’s first large-scale liquefied gas export facility – have meant that exports out of the United States have taken a quantum leap. In fact, per the Energy Department, gross liquefied natural gas exports are set to average 2.92 Bcf per day in 2018, increasing more than 50% from last year. Apart from the growing use of LNG and booming exports, the replacement of coal-fired power plants and higher consumption from industrial projects will likely ensure strong natural gas demand.
Want to Own a Natural Gas Stock Now?
The uncertain natural gas fundamentals (considering its seasonal nature) is responsible for the understandable reluctance on investors’ part to dip their feet into these stocks. Moreover, with prices remaining firmly in the lowly $2.60-$2.85 per MMBtu range for the last several months, a number of natural gas stocks got singed this year. In fact, leading producers Chesapeake Energy Corporation CHK, Southwestern Energy Company SWN, Ultra Petroleum Corp. UPL, Antero Resources Corporation AR and Gulfport Energy Corporation GPOR have all tumbled anywhere between 10% and 90% since the beginning of this calendar.
However, the good news is that there are certain natural gas stocks that one can buy immediately without waiting for the commodity to reach the desired $3 per MMBtu mark. If you are looking for near-term natural gas plays, Eclipse Resources Corporation ECR and Comstock Resources, Inc. CRK may be good selections. Eclipse has a Zacks Rank #1 (Strong Buy), while Comstock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Eclipse Resources is engaged in the exploration and production of oil and natural gas properties in the Appalachian Basin, including the Utica and Marcellus Shales. The company’s production consists of 72% natural gas. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 33% in the same period.
Comstock Resources is an independent energy exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties primarily in two regions in Texas and Louisiana. Natural gas output constitutes 95% of its total production. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 113% in the same period.
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