The U.S. Energy Department's weekly inventory release showed a lower-than-expected decrease in natural gas supplies. Despite the bearish inventory numbers, futures were up more than 1% week over week, buoyed by weather forecasts, indicating bouts of cold temperatures over most of the country in the coming days.

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But even if the mercury does plunge, downward pricing pressure over the past few weeks due to a warmer-than-normal December will still make it difficult for investors to be optimistic about the space. It would be wise to hold on to fundamentally sound gas-weighted producers SilverBow Resources (SBOW - Free Report), Range Resources (RRC - Free Report) and Comstock Resources (CRK - Free Report).

If you are still looking for near-term natural gas plays, Chesapeake Energy (CHK - Free Report) might be a good selection.

EIA Reports a Withdrawal Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states fell by 55 billion cubic feet (Bcf) for the week ended Dec 17 compared to the 57 Bcf decline guidance, per the analysts surveyed by S&P Global Platts.

The fifth successive draw of the winter heating season puts total natural gas stocks at 3,362 Bcf. While this is 234 Bcf (6.5%) below the 2020 level at this time, the below-consensus pull erased the market’s long-standing deficit to the five-year average that now stands at a surplus of 34 Bcf (1%).

Natural Gas Still Registers a Weekly Climb

Natural gas prices trended upward last week despite the lower-than-expected inventory withdrawal. Futures for January delivery ended Christmas Eve at $3.7310 on the New York Mercantile Exchange, rising 1.1% from the previous week’s closing. The increase in natural gas realization is primarily the result of a near-normal weather outlook (and the subsequent pick-up in heating demand) for the early part of next month.

Final Thoughts

As is the norm with natural gas, changes in temperature and weather forecasts can lead to price swings. Earlier in the week, the models called for cold snaps (or intense temperature-driven consumption) during the first few days of the new year, which helped bolster prices. But over the week, the weather pattern turned less severe, slightly denting cooling demand expectations and reversing some of the price gains.

Natural gas, however, remained supported by a stable demand catalyst in the form of continued strong liquefied natural gas (“LNG”) feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record higher prices of the super-chilled fuel elsewhere. Most analysts believe that deliveries appear poised for further gains through 2022 on surging consumption in Europe and Asia, especially as we head deeper into winter. The circumstances are particularly dire in Europe where gas supply is running low with the need for a steady refill from the United States going into the peak winter period. At the same time, promised flows from Russia have been limited.

But even the resilience in LNG exports cannot offset the ill-effects of a mild winter so far. With less-than-normal heating needs in December, withdrawals have been muted. The tepid inventory draws on the back of a warm December has brought back prices under the $4 threshold after recently topping $6 MMBtu for the first time since 2014 and reaching a 13-year high settlement of $6.312 in October.   

Investing Strategy

With the natural gas market being unpredictable and spooked by mild weather, investors are quite unsure of what to do. As of now, the lingering uncertainty over the fuel means that investors should preferably wait for a better entry point before buying shares in natural gas-focused companies SilverBow Resources, Range Resources and Comstock Resources.

SilverBow Resources is valued at around $362 million. The Zacks Consensus Estimate for SBOW’s current-year earnings has been revised 10.6% upward over the last 60 days. The company’s shares have rocketed 326.1% in a year.

SilverBow Resources — carrying a Zacks Rank #3 (Neutral) — reported EPS of $2.69 in November, a 30% surprise over consensus. SBOW beat the Zacks Consensus Estimate for earnings in three of the last four quarters but missed once. It has a trailing four-quarter earnings surprise of roughly 1.5%, on average.

Range Resources has an expected earnings growth rate of 2,533.3% for the current year. The Zacks Consensus Estimate for RRC's current-year earnings has been revised 11.7% upward over the last 60 days.

Range Resources, valued at around $4.8 billion, carries a Zacks Rank of 3. RRC has soared 181.8% in a year.

Comstock Resources has a projected earnings growth rate of 508.7% for the current year. The Zacks Consensus Estimate for Zacks Rank #3 CRK’s current-year earnings has been revised 9.4% upward over the last 60 days.

Comstock Resources beat the Zacks Consensus Estimate for earnings in three of the last four quarters and met once. It has a trailing four-quarter earnings surprise of roughly 42.5%, on average. CRK shares have gained around 94.5% in a year.

Having said all of this, we believe that the fundamentals of natural gas appear to be relatively tight for now. Also, Europe and Asia’s insatiable demand for LNG has put a floor beneath prices for the time being. Finally, should weather models flip materially colder (as is expected in January), there’s massive upside on the table. If that turns out to be the case, investors will do well to take a position in Chesapeake Energy.

Chesapeake Energy has a projected earnings growth rate of 121.4% for the current year. CHK's consensus estimate for the current year has been revised 16.1% upward over the last 60 days.

Chesapeake Energy beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The Zacks Rank #1 (Strong Buy) stock has a trailing four-quarter earnings surprise of roughly 23.1%, on average. CHK shares have rallied around 53.7% in a year.