The U.S. Energy Department's weekly inventory release showed that natural gas supplies decreased more than expected. The positive inventory numbers notwithstanding, futures settled with another loss week over week — sixth in the last seven — overwhelmed by excessive supply and insipid weather-related demand.

In fact, the market hasn't been kind to natural gas, with the commodity recently hitting fresh three-and-a-half-year lows due to worries about record output and concerns about a growing glut. At this time, we advise investors to focus on stocks like Coterra Energy CTRA and Cheniere Energy LNG.

EIA Reports a Withdrawal Bigger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell 9 billion cubic feet (Bcf) for the week ended Mar 8, above the guidance of a 3 Bcf withdrawal, per a survey conducted by S&P Global Commodity Insights. The decrease compared with the five-year (2019-2023) average net shrinkage of 87 Bcf and last year’s decline of 65 Bcf for the reported week.

The latest draw puts total natural gas stocks at 2,325 Bcf, which is 336 Bcf (16.9%) above the 2023 level and 629 Bcf (37.1%) higher than the five-year average.

The total supply of natural gas averaged 105.7 Bcf per day, down a marginal 0.1 Bcf per day on a weekly basis due to lower dry production.

Meanwhile, daily consumption fell to 106.5 Bcf from 108.5 Bcf in the previous week, mainly reflecting weakness in residential/commercial usage and a lower power burn triggered by a dip in heating demand.

Natural Gas Prices Still Finish Lower

Natural gas prices trended southward last week despite the higher-than-expected inventory decrease. Futures for April delivery ended Friday at $1.655 on the New York Mercantile Exchange, some 8.3% lower than the previous week’s closing. The fuel has declined about 34% this year, after tumbling 44% in 2023.

Investors should know that natural gas realization has been under pressure from strong production, an elevated level of 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 even prompted shale producers Chesapeake Energy CHK and EQT Corporation EQT to hit the brakes on new drilling.

CHK announced a reduction in its drilling rigs so as to lower volume. The company has decided to cut this year’s gas production expectations by around 20%. Chesapeake’s plans rippled through the market, with Appalachian Basin-focused EQT following on. The explorer and producer of natural gas said that it will lower its daily output by 1 Bcf to combat the supply glut in the U.S. market. According to EQT, the revised plan took effect in late February and will continue at least through March. This will likely reduce net production by 30-40 Bcf, per the company. While these production cut announcements temporarily sent natural gas prices higher, they have failed to galvanize the market.

As is the norm with natural gas, changes in temperature and weather can lead to price swings. With a seasonally warm winter so far and forecasts turning warmer, usage of the commodity to generate electricity has taken a hit.

Having said that, there are signs of curtailment in U.S. production. According to energy services provider Baker Hughes, the U.S. natural gas rig count — a pointer to where production is headed — is down more than 28% from last year. Industry observers believe this could set the stage for a pullback in near-term drilling and supplies.

Meanwhile, a stable demand catalyst in the form of continued strong LNG feedgas deliveries is supporting natural gas. As a matter of fact, LNG shipments for export from the United States have been elevated for months, reaching record levels 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.