The U.S. Energy Department's latest inventory report showed a lower-than-expected increase in natural gas supplies. Following this bullish data, together with worries over possible Hurricane-related production disruption, futures ended the week higher. 

However, natural gas is expected to remain in a volatile state depending on the weather outlook, supply/demand balance etc. In this situation, investors should focus on resilient stocks like Antero Resources AR and Coterra Energy CTRA, while it may be wise to avoid higher-risk options like Comstock Resources CRK.

Natural Gas Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 47 billion cubic feet (Bcf) for the week ended Sept. 20, below analysts’ guidance of a 53 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 88 Bcf and last year’s growth of 82 Bcf for the reported week.

The weekly build put total natural gas stocks at 3,492 Bcf, which is 159 Bcf (4.8%) above the 2023 level and 233 Bcf (7.1%) higher than the five-year average.

The total supply of natural gas averaged 107.2 Bcf per day, unchanged on a weekly basis.

Meanwhile, daily consumption rose to 97.2 Bcf from 95.4 Bcf in the previous week, mainly reflecting higher natural gas consumed for power generation.

Natural Gas Prices Finish Higher

Natural gas prices climbed last week, driven by a smaller-than-expected inventory build. Prices also got a lift from the anticipated fall in production on account of Hurricane Helene’s landfall. November futures closed at $2.90 on the New York Mercantile Exchange, marking a 6.7% increase — the fifth consecutive weekly rise. 

However, even with the recent outperformances, one has to consider the formidable natural gas supply surplus and the lingering uncertainty associated with it. With current inventories remaining well above both last year’s levels and the five-year average, the rally can be short-lived. Investors must remember that natural gas prices dipped to a four-month low of $1.88 in late August, underscoring the market's ongoing volatility.

How Should Investors Handle Natural Gas Stocks?

The natural gas market continues to struggle with oversupply, along with shifts in weather and production dynamics. With rising prices, production may see an uptick in the coming month. However, the increase in prices could dampen demand, potentially leading to a shortfall as the market balance shifts.

As such, investors should remain cautious. Focusing on fundamentally strong stocks like Antero Resources and Coterra Energy may offer more stability amid the uncertainty.

Antero Resources: It is one of the leading natural gas producers in the United States. Antero Resources has more than two decades of premium low-cost drilling inventory in the prolific Appalachian Basin, indicating a strong production outlook. AR churned out 311 billion cubic feet equivalent (Bcfe) in the most recent quarter, of which more than 60% was natural gas.

Antero Resources beat the Zacks Consensus Estimate for earnings in two of the last four quarters, met once and missed in the other. This Zacks Rank #3 (Hold) natural gas explorer has a trailing four-quarter earnings surprise of roughly 18.8%, on average. AR shares have moved up 18.7% in a year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coterra Energy: It is an independent upstream operator primarily engaged in the exploration, development and production of natural gas. Headquartered in Houston, TX, the firm owns some 183,000 net acres in the gas-producing Marcellus Shale of the Appalachian Basin. This #3 Ranked company churned out an average of 2,779.8 million cubic feet daily of the commodity from these assets in the June quarter.

Coterra beat the Zacks Consensus Estimate for earnings in two of the trailing four quarters and missed in the other two, the average being 5.9%. Valued at around $17.6 billion, CTRA has fallen 9.8% in a year.

On the other hand, companies like Comstock Resources appear risky in the near term. CRK is a leading independent natural gas producer with operations focused on the Haynesville Shale in North Louisiana and East Texas.

Reflecting the risks around natural gas, the Zacks Consensus Estimate for the Zacks Rank #5 (Strong Sell) company’s EPS has seen downward revisions. Over the past 60 days, analysts have lowered their estimates for both the current quarter and fiscal year by 333% and 185%, respectively.