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No Reasons To Expect A Surge In Natural Gas Prices

|Includes: The United States Natural Gas ETF, LP (UNG)

A few reasons for why the natural gas price drop is no accident

We are so used to seeing the prices go up all the time, that when a resource as important as natural gas is getting cheaper year after year, we start asking some common sense questions. The first instinct is to predict the reversal of the trend and to dismiss the natural gas price drop as an accident or a temporary thing. In reality, we should expect a bearish market for the upcoming years, because there are very few reasons for the prices to follow an upward trend.

Shale rock drilling changed the rules of the game

Strong production of natural gas from shale formations caused the prices to fall as much as 85% since the 2005 spike and this kind of drilling is here to stay. The process is already so effective that extracting the gas is cheaper than ever and the offer vastly surpasses the demand. Due to the fact that our pricing system is closely linked on short-term demand and supply, the natural gas prices are decreasing steadily. The storage facilities are unable to cope with the high production and there is a real risk for the system to be overwhelmed.

Regardless of how prices oscillated during the last decade, consumption remained at virtually the same level and now that production has increased, there are not enough interested buyers. On the other hand supply continues to stay high because producers can't afford to cease the extraction of natural gas. They have loans to repay and they have to choose between using the gas or losing it, a particularly tough decision given how low the prices are these days.

Export can lead to a significant increase in natural gas prices

The US market is saturated right now and it appears like for a couple of decades there would be no need for imports at all. If the prices continued to drop at the same steady rate, many producers will have to rethink their strategies and refit their equipment so that they can extract oil instead of gas. Long-term investments no longer make sense, because there is no clear indication that the demand will suddenly increase. Exports remain the only solution right now and given the fact that the natural gas prices are lower in the US than elsewhere, this looks like a smart move.

Natural gas costs three times more in Europe and six times more in Japan which explains why many see this resource as the one to fuel growth in the next decades. While in the long run it is plausible to expect the prices to rise steadily, very few investors can afford to keep their money blocked for the sake of long term gains of moderate proportions.

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Disclosure: I am long UNG.

Additional disclosure: I think the price has to go up in the long term.