Could Natural Gas Prices Catch Fire?

Natural gas prices at Henry Hub recently traded near $5. Can the commodity keep rising with the trend?

Feb 15, 2014 at 10:59AM

It's supposed to be the transition fuel of the 21st century. It's the fuel source that ExxonMobil bet $41 billion on when it acquired XTO Energy in 2009. And it's also the commodity that is up 40% in the last four months. 

Natural gas prices have been on fire, with Henry Hub futures contracts recently trading around $5/MMbtu. Can the commodity keep rising with the trend?

Lower supply and unseasonably cold weather
Natural gas prices have come a long way from 2012, when they were trading around $2/MMbtu.

Since that time, in order to reduce supply, many natural gas producers, such as Chesapeake Energy (NYSE:CHK) and Range Resources (NYSE:RRC), have cut back on natural gas production and focused more on producing higher-margin liquids. 

The total U.S. natural gas rig count has fallen steeply as well. According to Baker Hughes, the U.S. natural gas rig count was only 351 on February 7, versus 600 in 2012 and over 1,600 in 2008.  

On a five-year timeline, natural gas demand has risen as utilities increasingly choose cleaner natural gas over coal. According to the EIA, natural gas now accounts for roughly 27% of all electricity generated in the U.S. versus only 21% in 2008. 

The greatest reason for the recent rise in natural gas prices is the unseasonably cold weather. Because of frigid temperatures and several major winter storms, natural gas storage levels are 28.8% below year ago levels and 22.4% below the 5-year average. The unexpected draw-down has led some utilities to ask consumers to conserve power while leading to greater volatility in futures markets.  

The bottom line
Natural gas contracts typically trade lower in warmer months. This year is likely to be no different.

According to CME futures, despite the recent bullishness, the market thinks natural gas prices will be range-bound between $4/MMbtu and $5/MMbtu over the next two years. 

The Energy Information Agency also expects natural gas consumption to stay relatively flat this year. The agency expects natural gas consumption for 2014 to average around 70.2 billion cubic feet per day, or a 1% decrease over 2013.  

Many believe that natural gas prices will only rise in the long term if the Obama administration approves more LNG export terminals. Global LNG prices are currently much higher than domestic natural gas prices. According to the Energy Intelligence Group, the spot price for LNG is around $19 in Japan and $15 in Europe. 

On February 11, the U.S. government approved a Sempra Energy (NYSE:SRE) LNG export terminal in Louisiana. The approval is the sixth over the past 12 months. 

Because of concerns that high natural gas prices will lower U.S. manufacturing and chemical industry competitiveness, however, some investors believe the Obama administration may be more stingy in its LNG export terminal approvals going forward. 

Being range-bound between $4 and $5 may be the best thing for natural gas in the long term. The price is high enough to encourage production, but not high enough to choke future demand. 

How can you profit from surging natural gas production?
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 

Jay Yao has no position in any stocks mentioned. The Motley Fool recommends Range Resources. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers