Due to a misunderstanding of the changing North American natural gas supply/demand balance, most investors and many on Wall Street believe natural gas prices will continue to wallow near current levels for much of the next two years. Conventional wisdom will shortly be proven wrong once again. In fact, the improving fundamentals of the North American natural gas market have set the stage for a ferocious rally in natural gas over the next 18 months. Investors who can look beyond today’s gloomy outlook stand to profit handsomely from the NYSEARCA:UNG and long term options on the UNG as natural gas prices rise and the contango of the futures curve flattens out and heads towards backwardation.
Probably the largest reason for the negative sentiment towards natural gas is the belief that shale gas is plentiful and will keep prices near current levels or lower for years to come. I see several flaws in this line of thinking. While shale gas production has grown approximately 16-fold over the last five years and accounts for 13% of total U.S. natural gas production, future gains in shale gas production are going to be very hard to come by, if not impossible, with the country’s largest shale gas field, the Barnett shale, now in decline. The decline of the Barnett and the high decline rates of other unconventional and conventional fields around the country now have the U.S. gas production treadmill running so fast that today’s pace of natural gas directed drilling is nowhere close to keeping production flat. A good example of how fast the treadmill is now running is the State of Texas.
The Lone Star state is country’s largest natural gas producer by a factor of three. Despite laying claim to a portion of the Haynesville shale play and the rapidly growing
