Will U.S. Natural Gas Finally Bounce in the Second Half?

With half of 2012 in the record books, it's important to take a look at whether the stocks that interest you can live up to their full potential. By making sure you know about a company's future plans and possible challenges, you can make a better decision about whether it's a smart investment for your portfolio.

Today, let's take a look at United States Natural Gas ETF (NYSE: UNG  ) . As we saw in our look at U.S. Natural Gas last month, the exchange-traded fund has had a lousy 2012 so far, as the glut of natural gas that resulted from shale gas plays and other unconventional sources has pushed prices to multiyear lows. But recently, natural gas prices have started to recover somewhat. Let's take a quick look at the prospects for the ETF for the rest of the year and beyond.

Stats on U.S. Natural Gas ETF

Expected Natural Gas Consumption, 2012 69.5 Bcf/day
Expected Natural Gas Consumption, 2013 71.3 Bcf/day
Expected Natural Gas Inventory, Oct. 2012 4,015 Bcf
2012 Natural Gas Price Forecast $2.55/MMBtu
2013 Natural Gas Price Forecast $3.23/MMBtu
CAPS Rating (out of 5) **

Source: Energy Information Administration June 2012 outlook.

Will U.S. Natural Gas head higher?
In the past three weeks, the U.S. Natural Gas ETF has jumped by almost 30%. After natural gas prices fell to decade lows, it only made sense that the commodity would eventually bounce.

But there are good fundamental reasons to expect that natural gas prices may keep rising, pulling the U.S. Natural Gas ETF higher. As Chesapeake Energy (NYSE: CHK  ) , ConocoPhillips (NYSE: COP  ) , and other energy giants have cut back on production, oversupply should slowly stop being so much of a problem. Meanwhile, a hot summer will encourage greater electricity consumption, and with Duke Energy (NYSE: DUK  ) and Southern Co. (NYSE: SO  ) among the many utilities shifting electricity production from coal-fired plants to gas, both ends of the supply and demand equation favor higher prices.

Still, the conditions that lead the ETF to underperform changes in natural gas prices look like they'll continue to plague U.S. Natural Gas. Futures for January have already priced in a $0.60 to $0.70 rise in gas prices, and so even if spot prices rise that high, investors in the ETF likely won't share in the gains.

After such a huge decline, the U.S. Natural Gas ETF could continue to benefit from a short-term bounce in natural gas prices. However, it will continue to suffer from the structural deficiencies that have made it a terrible long-term investment.

If you like prospects for energy, let us show you another stock you should look at more closely. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects.

Click here to add U.S. Natural Gas ETF to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Southern Co. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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