Home/Blog/Trading Ideas/Gas Boom's End Could Be Industry's Best Development

Gas Boom's End Could Be Industry's Best Development

28 March 2013 in Trading Ideas

Following the decline of natural gas prices to their lowest level in a decade, evidence is mounting that the industry’s supply-and-demand ratio is helping revive the fuel’s fortunes.

As the Wall Street Journal recently reported, natural gas prices last week moved above $4 per British thermal units and have now risen 73% from a year earlier.1

What’s driving this? For starters, recent colder-than-normal weather in many parts of the US has resulted in higher consumption of natural gas to meet heating needs. That has helped drive down the amount of gas held in US underground storage areas by 21% in the past year, according to the Journal.

But also contributing – and a possible good sign for the future – is data showing the surge in gas output has begun to slow, which could keep gas prices moving higher. The Department of Energy has forecasted that the nation’s gas output will rise just 0.7% this year, reflecting the smallest increase since 2005.

What’s more, some analysts even see production eventually starting to decline. The Journal reported that a Barclays survey of 52 American natural gas producers showed those companies would see their output decline by 0.4% this year.

Such a relative return to normal has been difficult to imagine amid a recent boom in natural gas production boosted by newer technologies, like fracking, that have helped extraction efficiency. Indeed, just a few months ago, many analysts were predicting a substantial stockpile of 2 trillion cubic feet of natural gas would remain when the heating season subsided as we head toward the summer months.

The recent rise in gas prices has provided a lift to the stock prices of natural gas producers, who, in turn, weren’t faring too well as prices plummeted. One natural gas investment alternative, the Shale Gas motif, has risen 4.4% in the past year, but is up 14.8% in 2013.

Of course, when one lives by the supply-and-demand ratio, one can also die with it, and it remains to be seen whether another doubling of natural gas prices can dampen the pricing power that producers currently enjoy.

1 Jerry A. Dicolo, “Natural Gas Blazes a Path to Higher Prices,” WSJ.com, March 21, 2013.