Have Natural Gas Prices In The U.S. Found Their Bottom?

Includes: LNG, NAGS, UNG, UNL
by: Simit Patel

The global energy picture is currently centered around natural gas. Thanks to hydraulic fracking, a new industry and a new supply boom is under way, and we've gone from prognostications of running out of natural gas to an overabundance that has sent prices, at least in the U.S., plummeting. This naturally has created greater demand for natural gas and a greater incentive to switch to energy systems that can run on natural gas. For this reason, the developments in the natural gas market are worth watching for all those invested in the energy sector.

However, I believe natural gas prices are now set to rise. There are a few reasons for this:

1. U.S. approves exports of liquefied natural gas. Finally, U.S. regulators have approved the nation's first big gas export plant, to be run by Cheniere Energy (NYSEMKT:LNG), in half a century. I view this as a rather significant development. It will allow the U.S. to deliver its bounty of cheap natural gas to the world, and will help the world move away from a deeply fragmented market in which prices vary drastically across jurisdictions (see this breakdown) toward a global market where price discrepancies across jurisdictions are less severe. I believe this means prices in the U.S. will rise, while prices elsewhere, particularly across Europe and in Japan, will decline. This is the biggest reason why I believe natural gas prices may have found their bottom in the U.S. And because of that, it is especially important to note that while the U.S. has approved a new natural gas export terminal, this terminal will not be operational before 2015.

2. Drillers are finding it unprofitable. Not to be overlooked is this Business Week story noting that natural gas drilling is declining in the U.S. because prices are simply too low. Markets tend to overshoot before correcting, and stories like the Business Week article suggest we may have overshot to the downside. In addition, we are seeing a decline in rig count.

3. Demand has increased. Thanks to pending regulation that would basically prohibit coal power plants in the U.S. as well as power plants that are increasingly converting to natural gas for cost reasons (see here and here for two examples), demand is rising. If demand is rising at a time when drillers' margins are being squeezed and rig count is declining, the price could rise to reconcile the tension between supply and demand.

Personally my interest in the natural gas market stems from my interest in nuclear power (NASDAQ:NUCL), which is my preferred opportunity to focus on in the energy sector, particularly via investing in uranium miners (NYSEARCA:URA). For those looking to speculate on natural gas prices, there are a number of ETFs to choose from; (NYSEARCA:UNG), (NYSEARCA:UNL) and (NYSEARCA:NAGS) are all options. This article does a good job of explaining the differences. There are significant differences between those ETFs, so I encourage investors to research accordingly. Personally, if I were to invest in natural gas I would be more inclined to do so via the futures or CFD markets, although if I had to pick an ETF, I would likely go with UNL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.