As an investment, natural gas has not been kind to investors over the past 5 years. Even though it has managed to stage a decent rally from the 2012 lows, natural gas has retraced. As a commodity, natural gas is still trading around 30% below the highs of the year.
Natural gas continues to suffer from the problem of marginal cost being low due to advances in horizontal drilling and hydraulic fracturing. In too many places around the country, natural gas is being produced as a byproduct of drilling for crude oil for too cheap. The problem is made worse now that some states are now mandating that natural gas be captured rather than flared.
On the other side of the equation, demand has not picked up enough. Natural gas vehicles have not caught on. Coal, while half dead, still competes with natural gas due to its cheap cost. Due to the federal laws preventing exports, natural gas is still stuck in the U.S., unable to reach other parts of the world where the commodity trades at multiples of the domestic price.
But in many ways, natural gas prices could be bottoming. While the four words in the English language are "this time is different", natural gas is unlikely to do a 2011 dive again.
One reason is that temperatures are only going to get colder as winter approaches. As natural gas is used for heat, demand will naturally pick up and prices will rise. With inventories still below their 5-year averages, a colder-than-expected winter could lead to a significant natural gas spike.
Another reason is that the government gave permission to Pioneer Natural Resources and Enterprise Products to export crude condensates. While the permission does not apply to natural gas, it does show that the administration is open to exporting American energy. This new policy could make LNG export terminal approvals more likely, and could change the current sentiment on natural gas from bearish to bullish.
Finally, the technical perspective is getting better. Catching a falling knife is always a difficult proposition, and many market participants would rather wait for the price to stabilize or show signs of a bottom before investing. Given that natural gas has stopped its fall and is creeping around the all-important $4 level, the fall looks temporarily over. If natural gas can get past the $4 line, it may be able to pick off the stops above that level and the price could rally further. If natural gas can get sufficiently far above $4, this downward move looks to be over.
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