The U.S. Energy Department's latest inventory report showed a higher-than-expected increase in natural gas supplies. Following this bearish data, together with a bearish weather outlook, futures ended the week considerably lower.

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 Cheniere Energy LNG and Shell plc SHEL, while it may be wise to avoid higher-risk options like Antero Resources (AR).

Natural Gas Build Larger Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 76 billion cubic feet (Bcf) for the week ended Oct. 11, above analysts’ guidance of a 74 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 89 Bcf and last year’s growth of 93 Bcf for the reported week.

The weekly build put total natural gas stocks at 3,705 Bcf, which is 107 Bcf (3%) above the 2023 level and 163 Bcf (4.6%) higher than the five-year average.

The total supply of natural gas averaged 108 Bcf per day, up 0.5 Bcf per day on a weekly basis, due to higher shipments from Canada.

Meanwhile, daily consumption rose to 99.7 Bcf from 96.6 Bcf in the previous week, mainly reflecting higher residential/commercial usage, partly offset by lower natural gas consumed for power generation.

Natural Gas Prices Finish Significantly Lower

Natural gas prices fell sharply last week, following a larger-than-expected inventory build. Prices were also pulled down by demand destruction from above-normal temperatures predicted for the remainder of this month. November futures closed at $2.258 on the New York Mercantile Exchange, marking a 14.2% decrease — the third loss in as many weeks. 

Natural gas prices remain pressured by strong production, high stockpiles and weak demand due to mild weather. Current inventories are above last year’s levels and the five-year average, signaling a bearish outlook. Investors must remember that natural gas prices fell to a four-month low of $1.88 in late August, underscoring the market's ongoing volatility.

How Should Investors Play Natural Gas Stocks?

The natural gas market continues to struggle with oversupply, along with shifts in weather and production dynamics. As such, investors should remain cautious. Focusing on fundamentally strong stocks like Cheniere Energy and Shell plc may offer more stability amid the uncertainty.

Cheniere Energy: Being the first company to receive regulatory approval to export LNG from its 2.6 billion cubic feet per day Sabine Pass terminal, Cheniere Energy enjoys a distinct competitive advantage.

Cheniere Energy beat the Zacks Consensus Estimate for earnings in two of the last four quarters and missed in the other two. This Zacks Rank #1 (Strong Buy) natural gas exporter has a trailing four-quarter earnings surprise of roughly 55.9%, on average. LNG shares have moved up 7.6% in a year.

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

Shell: Shell’s long-term strategy revolves around LNG. This London-based firm bought BG Group for $50 billion in 2016 to become the world’s largest producer and shipper of LNG. With LNG export demand likely to rise significantly in the near-to-medium term, Shell’s position as a major supplier should help it meet the fuel’s growing demand.
AR
SHEL beat the Zacks Consensus Estimate for earnings in each of the last four quarters. This Zacks Rank #3 (Hold) natural gas exporter has a trailing four-quarter earnings surprise of roughly 12.6%, on average. Shell shares have moved down 1% in a year.

On the other hand, companies like Antero Resources appear risky +for the near term. 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.

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 128% and 102%, respectively.