Why natural gas prices are so volatile — and what it means for our lone energy stock
Natural gas prices have had an up and down January — taking Club stock Coterra Energy along for the wild ride. After rising more than 30% over the first two weeks of the year, natural gas futures plunged 24% last week and have continued their fall in recent days. The commodity lost 4% on Monday, but in a volatile session Tuesday settled up 1.3%, at $2.45 per million British thermal units. Nevertheless, nat gas prices remained negative year to date. Early Wednesday, nat gas prices swung higher. Shares of Coterra – whose total revenue is split evenly between natural gas and crude oil – gained ground Tuesday to more than $24 each, putting year-to-date declines at less than 3.5%. That performance has been marginally worse than the S & P 500 energy sector over the same stretch. Meanwhile, the broad S & P 500 index has risen roughly 2% in 2024. CTRA .SPX 1M mountain Coterra Energy's stock price over the past month compared with the S & P 500. Despite some seeing a challenging near-term picture for natural gas prices, our investment outlook on Coterra and the energy sector more broadly remains the same. In a diversified portfolio, it's worth owning an oil-and-gas stock, partly as a hedge in case there's a dramatic spike in energy prices, as there was in early 2022 after Russia invaded Ukraine. At this point, Coterra is our company of choice due to its significant exposure to both natural gas and oil, giving it flexibility on production, along with its internal improvements on well productivity to aid profitability — the latter being called out in multiple Wall Street analyst upgrades of the stock in recent weeks. Additionally, the company is committed to returning excess cash to shareholders, with a wise preference on buybacks over variable dividend payouts. It also stands to gain from the expected increases in U.S. liquified natural gas export capacity beginning primarily in 2025. Still, volatile oil and natural gas prices hold sway over Coterra's near-term stock moves. And the swift reversal of fortunes for natural gas has been hard to ignore. However, some context is necessary when analyzing the swing. "Last week's meltdown appears so significant because the move higher was, really, from a fundamental perspective completely overdone," said Eli Rubin, a natural gas analyst at EBW Analytics Group. The commodity was particularly beaten up to end 2023, Rubin said, after one of the warmest Decembers on record limited demand for natural gas to heat homes and other buildings. The warm December added insult to injury amid strong U.S. natural gas production and mild weather throughout the fall, contributing to an oversupplied market. The result is traders had grown quite bearish on natural gas, Rubin said, which created the technical conditions for a dramatic spike in prices if more positive fundamental signs emerged. And they did, in fact, emerge by way of winter storms and bitter-cold temperatures that swept large parts of the U.S., causing a surge in demand for natural gas. That technical and fundamental backdrop created the jump of more than 30% in natural gas prices. However, the market's focus last week began to shift toward weather forecasts for later in the month, which point to a return of warmer temperatures. And that's generally what sparked the big decline in natural gas prices that have persisted into this week, Rubin said. Over the next three to six months, Rubin said he expects the natural gas market to remain "vastly oversupplied," suggesting more pressure on the commodity's price could be on the horizon. But looking out further on the horizon, Rubin said he sees the outlook starting to brighten as LNG-related demand is set to appear and hopes for a more normal winter emerge. That should bode well for Coterra. (Jim Cramer's Charitable Trust is long CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A drilling rig operates in the Permian Basin oil and natural gas production area in Lea County, New Mexico, February 10, 2019. Nick Oxford | Reuters