Near-Term Uncertainties To Weigh On These Energy Stocks

While we cheer the U.S. bull market’s 8-year anniversary, oil prices have broken below $50 a barrel after the Energy Department's weekly inventory release showed record high supplies and persistent strength in production. What’s more, even natural gas briefly fell back under the key psychological level of $3 per million Btu (MMBtu) following a bout of unseasonably mild temperature.

Therefore, although the OPEC-induced rally has helped commodity prices recover somewhat since late-2016, they still remain significantly below 2014 levels.

In fact, as long as there is big oil and natural gas surplus, the arduous market environment will continue -- suggesting that the odds are firmly stacked against a sustained rally. With U.S. crude stockpiles soaring on the back of robust shale production and natural gas unable to overcome the weather hurdle, money managers do not rule out chances of more pain ahead for energy stocks.

As there are no guarantees that things will improve in the near-to-medium term, investors would be better off ignoring the following set of stocks.

Natural Gas Market Turns Ugly

Natural gas rebounded strongly after hitting 17-year lows of around $1.6 per million Btu (MMBtu) in the first quarter of 2016, rising a phenomenal 150% to a cent below $4 at the end of December. However, selling came back to the market since then. Year-to-date, natural gas has performed the worst among major commodities. It dived more than 35% through late February and while prices have rebounded somewhat in March, they are still unable to stay above $3 for a reasonable period of time.

With the winter heating season – which runs from Nov 1 to Mar 31 – coming to an end and the injection season set to start, fundamentals point to 'lower for longer' prices. Agreed, this year there is around 16% less natural gas in storage compared to the year-ago period, but worryingly, the current stock is 15% more than the five-year average for this time of the year. A warmer winter translated into weaker demand for the heating fuel and upended demand forecasts. And now, as March comes to a close, one would expect tepid demand for the commodity with spring-like weather expected over most parts of the nation in the upcoming weeks.

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