Natural gas market watchers should get use to low energy prices, which could keep gas-related exchange traded funds depressed.
Morningstar‘s Mark Hanson, an energy strategist, and Stephen Simko, director of energy equity research, have lowered their natural gas outlook, project a $4 per thousand cubic feet over the midcycle.
Despite rising exports and industrial consumption in response to the cheap natural gas prices, the increasing efficiency gains and excess services capacity will continue to weigh on the market.
Over the past year, the United States Natural Gas Fund (NYSEArca: UNG) has plunged 44.3% while the First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), which is comprised of natural gas exploration and production companies, plummeted 47.2%. Year-to-date, UNG fell 5.9% and FCG declined 9.3%.
Nevertheless, the energy analysts argue that natural gas-focused explortaion and production firms from the Marcellus region, including Cabot Oil & Gas (NYSE: COG), Range Resources (NYSE: RRC) and Southwestern Energy (NYSE: SWN), could stand out. FCG includes a 3.5% position in COG, 3.2% in RRC and 2.9% in SWN.
On the demand side, natural gas consumption is expected to increase for power consumption as gas generators replace old and dirtier coal-fired plants. However, plants could switch between gas and coal depending on price gains, which should keep a cap on gas prices. The switch to alternative and clean energy sources could also keep natural gas demand in check.
Furthermore, the U.S. could begin exporting excess natural gas to foreign markets, notably in Mexico where the country is constructing gas generators to meet rising electricity needs and faces limited additions to its gas production.
The demand, though, will be met by rising supply due to low-cost extraction from areas like Marcellus, Utica, and various oil-rich projects.
The analysts warn that should oil prices remain lower than-expected, U.S. oil projects will be delayed, which could lead to further cost pressures, a negative for natural gas markets. If infrastructure does not meet the new supply, activity could slow and contribut to higher gas prices. Greater industry consolidation could also lead to higher costs for producers and higher gas prices. Improved technologies to drilling would lower costs and gas prices going forward. Lastly, a weaker economy could lead to diminished drilling activity and higher gas prices.
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.