Natural gas prices and related exchange traded funds have been bouncing back, and U.S. energy companies may help support higher prices as they finally begin easing up on production.
The United States Natural Gas Fund (NYSEArca: UNG) has surged 9.0% so far this month. Nevertheless, UNG is still down 5.0% year-to-date and 46.6% lower over the past year.
Natural gas prices have hovered near record lows after the shale oil boom in the U.S. pressured both gas and oil prices. Despite the low gas prices, drillers kept producing natural gas since high oil prices made it profitable for energy companies to keep tapping into areas that yield both oil and gas, reports Timothy Puko for the Wall Street Journal. However, with oil prices lower, there is less incentive to keep drilling.
Industry experts from the government and private sector now project monthly gas production to flatten and even decline in 2015. Energy companies have already closed over half of their oil rigs and cut down the number of gas rigs to their lowest level in the 28 years Baker Huges Inc. has kept count.
“If you believe that U.S. oil production is peaking, then you would see a similar knock-on impact to gas,” Greg Sharenow, a portfolio manager at Pacific Investment Management Co., said in the WSJ article. “It’s the same companies and the same economics being challenged from both sides.”
The lower gas rig count is beginning to show in the natural gas market. For instance, gas briefly traded in a bull market after gaining 20% off its recent low, but prices swung again. NYMEX natural gas futures are now trading at $2.88 per million British thermal units. More bullish investors anticipate prices to continue to rise as production growth slows and heating demand picks up in winter.
Nevertheless, economists and analysts warn to keep expectations grounded as production will still likely outpace demand for most of 2015. Additionally, production could pick up if oil prices see a sustained rally.
Meanwhile, energy producers, like Range Resources Corp. (NYSE: RRC) and Chesapeake ENergy Corp. (NYSE: CHK), have cut their forecast for the year, citing a broad collapse in energy prices for oil and other similar liquid fuels.
The First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), which is comprised of natural gas exploration and production companies, includes a 3.1% tilt toward CHK and 4.1% in RRC. FCG is still stuck in a downtrend, falling 1.7% over the past week and declining 8.9% year-to-date. Natural gas producers typically lag behind any rally in the commodities market.
United States Natural Gas Fund
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.