Freedom: upside potential in gas producers’ shares has diminished

Low gas consumption by power plants and expectations of warmer weather in the U.S. in the second half of autumn may continue to cap prices in the week of October 19–23. Freedom Broker analysts Sergey Pigarev and Akmaral Burkutova believe that after two weeks of steady gains in gas producers’ shares, the scope for further upside has become more modest.

At the same time, the performance of the commodity and the stocks is diverging: over the previous week, U.S. gas fell 3.2%, while shares of the largest gas producers rose by an average of 5.5%.

Gas fell to $3.1

According to Freedom’s expert review, the price of natural gas in the U.S. declined over the week to $3.1 per million British thermal units — the standard unit of energy measurement in the gas market. The price was 2% higher than a year earlier, but 24.7% below the average for the previous five years.

Quotes were pressured by forecasts of warmer weather and the resumption of operations of the Mountaineer Xpress pipeline in West Virginia. For the coming week, analysts also point to weak demand from power plants and expectations of a warm second half of autumn, which limit price support ahead of the heating season.

Inventories rose less than expected

Statistics for the week ended October 9 were favorable for prices: the volume of gas in U.S. storage increased by 67 billion cubic feet versus the expected 76 billion. Total inventories reached 3.567 trillion cubic feet. That is 3.9% below last year’s level, but 1.3% above the five-year average. In the same week a year earlier, the increase was 80 billion cubic feet, and the five-year average was 90 billion.

Thus, slower replenishment of storage supported the market, but did not offset the pressure from weather forecasts and weak demand.

Producers’ shares rose despite the decline in gas

Share prices of the largest U.S. gas producers gained an average of 5.5% over the previous week. Analysts attribute the increase to record-high gas deliveries to liquefaction terminals, low injection rates into storage, and a positive market reaction to preliminary data on hedging results for Q3.

Hedging allows companies to partially protect themselves from changes in commodity prices using financial instruments. Therefore, the results of such operations can affect business valuation alongside current gas quotes.

After two weeks of share price gains, Freedom assesses their further potential more cautiously. In the review, this is attributed to the rise in the shares that has already occurred and the continuing pressure on gas prices.

In Europe, prices are supported by supply risks

In the European market, the situation differs from that in the U.S. As of October 18, EU gas storage facilities were 74.5% full versus the five-year average of 89.1%. A week earlier, the fill level was 73.7%.

TTF quotes in Europe rose 8% over the week to $28.9 per million British thermal units. According to Freedom, support came from concerns about a supply shortage amid continuing attacks on vessels in the Strait of Hormuz. Risks to maritime shipping intensify competition between Europe and Asia for liquefied natural gas supplies.

Earlier, Freedom Broker warned about seasonal pressure on U.S. gas ahead of the heating season. At that time, analysts viewed a significant correction in the commodity and producers’ stocks as a potential entry point ahead of a recovery in winter demand. Now, after the shares have risen, their assessment of short-term potential has become more restrained.

Not an individual investment recommendation.