The U.S. Energy Department's latest inventory report revealed a smaller-than-expected build in natural gas supplies, giving futures a modest lift. Prices edged up slightly week over week, but the commodity still hovers around the low $2 mark.

Despite this recent bump, natural gas faces persistent headwinds, with the market highly sensitive to erratic weather patterns that sway prices and disrupt stability. For now, investors should keep their eyes on resilient stocks like Range Resources RRC and Antero Resources AR.

Natural Gas Build Smaller Than Market Expectations

Stockpiles held in underground storage in the lower 48 states rose 13 billion cubic feet (Bcf) for the week ended Aug 30, below analysts’ guidance of a 29 Bcf addition. The increase compared with the five-year (2019-2023) average net injection of 51 Bcf and last year’s growth of 33 Bcf for the reported week.

The weekly build puts total natural gas stocks at 3,347 Bcf, which is 208 Bcf (6.6%) above the 2023 level and 323 Bcf (10.7%) higher than the five-year average.

The total supply of natural gas averaged 108.1 Bcf per day, down 0.7 Bcf per day on a weekly basis, due to lower shipments from Canada and falling dry production.

Meanwhile, daily consumption dropped to 98.9 Bcf from 101.2 Bcf in the previous week, mainly reflecting lower natural gas consumed for power generation.

Natural Gas Prices Finish a Little Higher

Natural gas prices ticked higher last week, fueled by a smaller-than-expected inventory build. October futures closed at $2.28 on the New York Mercantile Exchange, marking a 0.9% increase from the previous week’s finish. Yet, this uptick follows a steep descent—natural gas has tumbled nearly 30% over the last three months, wiping out the 47% gains seen in April and May. Notably, prices hit a four-month low of $1.88 in late August, underscoring the market's volatility.

Investors should be aware that natural gas prices have been squeezed by robust production, high stockpiles, and weak weather-driven demand. Current inventory levels are notably above both last year’s figures and the five-year average, fueling a bearish outlook for the commodity. In response, major producers like APA Corporation APA and EQT Corporation EQT are pulling back on new drilling efforts.

APA plans to curb natural gas output by 90 million cubic feet per day (MMcf/d) in the third quarter, following a second-quarter reduction of 78 MMcf/d to counter low realizations. Meanwhile, Appalachian Basin-focused EQT, the largest U.S. natural gas producer, announced it would maintain a daily production cut of about 0.5 billion cubic feet through the second half of this year.

Ironically, some of these companies had just resumed production previously deferred during the April-May price recovery. However, the renewed output quickly weighed on prices again, underscoring the fragile balance in the market. 

On the demand side, natural gas finds support from steady LNG feed gas deliveries, acting as a stable catalyst. U.S. LNG exports have remained elevated, fueled by environmental initiatives and Europe's push to reduce reliance on Russian natural gas amidst the ongoing war in Ukraine. The global LNG market is bracing for a strong winter season, potentially extending into early 2025, buoyed by positive signals from the seaborne cargo market and increased susceptibility to supply disruptions.