Natural Gas Price: 2016 Rebound?

| February 24, 2016

Is There Any Hope For A Natural Gas Price Rebound?

Much like the price of oil, the natural gas price has been decimated the past few years.  In fact, the commodity recently plunged to new decade lows under $1.90 mmBtu.  At that price, natural gas is 70% lower than where it traded in early 2014.

What sent the commodity careening into the gutter?

Supply- lots of it.

US natural gas supplies have exploded thanks to the US shale boom that started in 2009.

According to the Energy Information Administration (EIA), US dry natural gas production surged to 2.3 trillion cubic feet (tcf) per month in August 2015.  That’s a remarkable increase over the 1.7 tcf per month produced in August 2009.

What’s more, recent EIA natural gas storage reports reveal supplies of the commodity are sitting near record levels.

For the week of February 12th, 2016 there were 2.7 billion cubic feet in storage, which is a 24% increase over the same period last year and 25% higher than the 5-year average.

Take a look for yourself…

natural gas price is a reflection of supply

As you can see, current supply (blue line) is well above the 5-year average.  It’s no wonder natural gas is once again plummeting below $2.00 mmBtu.

Let me show you what I mean…

Natural gas price

With the low demand spring shoulder season just around the corner, there’s a very good chance natural gas breaks under the mid-December 2015 low.  Such a break of technical support would put the commodity on a collision course with the $1.25 mmBtu low set in 1995.

In the short-term, there’s simply no reason to be bullish of natural gas.

However, the long-run outlook is drastically different…

First of all, US dry gas production has slowed meaningfully the last few months.  In fact, production is down 1.2 billion cubic feet per day since September 2015.  Whether this recent production downturn is a new trend or just a seasonal blip remains to be seen.

But consider this…

The US oil industry is in shambles right now.  With both oil and natural gas trading at decade lows (and below the cost of production for most companies), there’s enormous financial stress on the industry.

Most importantly, the hedges that kept natural gas producers alive in 2015 are now expiring.  In other words, companies that could sell gas at inflated hedged prices a few months ago are currently being shoved into the reality of selling their product at wellhead prices far below the cost of production.

Fact is, the rubber is finally meeting the road for most US natural gas producers.

The vast majority of companies simply can’t justify keeping the taps open with natural gas trading at $1.80 mmBtu.

That’s why, in my opinion, the recent downturn in US production is a new trend that will accelerate as 2016 rolls on.  And once you factor in quickly increasing overseas LNG exports, you can make the case for rising natural gas prices later this year.

Here’s the most important factor…

Not that long ago, capital was easy to come by in the oil and gas industry.  But nowadays, banks aren’t nearly as gung ho to lend to financially unstable oil and gas companies.

As a result, any increase in the natural gas price won’t likely be met with a corresponding increase in production.

Not only will a large swath of natural gas producers be bankrupted over the next six months, but the survivors will be hard pressed to ramp up production due to capital constraints.

Bottom line…

While the near-term outlook is resoundingly bearish for the natural gas price, a longer-term view has some very promising aspects.  To profit from the wild swings in this commodity, be sure to check out natural gas ETFs.

Until Next Time,

Justin Bennett
Commodity Trading Research

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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