After producing double digit returns, natural gas prices, along with related exchange traded funds, have begun to pull back on the weaker near-term demand outlook. However, as U.S. companies reduce production and energy companies switch over from coal, natural gas traders may finally have something to look forward to.
U.S. Natural Gas Fund (UNG) has gained 10.6% over the past month, but over the last week, the fund lost 9.5%, moving back toward its 50-day moving average support level.
Natural gas prices rallied from under $2 per MMBtu late April, it's lowest level in over a decade, to about $2.7 per MMBtu in mid May. Currently, prices stand at about $2.5 per MMBtu.
Since rallying about 35% from the low, many analysts don't believe the fundamentals warrant anymore price appreciation.
It will likely be "very tough to rally from here," Subash Chandra, a managing director at Jefferies, said, reports Claudia Assis for MarketWatch.
The warmer-than-expected spring season has helped boost natural gas prices, but a hot summer season has yet to manifest, lowering demand for air conditioning and tripping the rally in gas.
"The market is really searching here," Rich Ilczyszyn, market analyst at iiTrader, said in a Wall Street Journal report. "The component that has been missing is extreme weather."
Currently, there is still a supply glut in the natural gas market. Around 2.744 trillion cubic feet is in storage, a record high for this time of year and 38% above the five-year average.
However, according to business intelligence provider GlobalData, the cheap natural gas has persuaded power producers to switch from coal to gas and will continue to drive demand in power generation and industrial sectors over the next few years, the Oil & Gas Financial Journal reports.
At "some higher price level, perhaps nearer to $3, coal might be cheaper for some power plants, reducing natural gas demand again," Tim Evans, an analyst with Citi Futures Perspective, said in the MarketWatch article.
Companies like Xcel Energy Inc., Calpine Corp. and Progress Energy, Inc. have announced plans to close down or convert coal-fired plants for gas generation. Dow Chemical Company and Shell Chemical, among others, also plan to increase US petrochemical capacity to take advantage of the country's copious natural gas beds.
Meanwhile, some other companies are moving away from shale gas production. GlobalData calculates that U.S. gas production in 2012 will diminish 2.6% year-over-year, with additional declines of 0.5% to 1% in the next few years.
U.S. Natural Gas Fund
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.