When it comes to natural gas prices, we’ve seen a lot of volatility these past few weeks.
For instance, on August 2, natural gas prices plunged 7.9% – the biggest single-day drop in three years. Then, on August 9, a weak U.S. inventory report drove prices 6% higher, to more than $3 per million British thermal units (MBtu). And in just the past week, prices have slumped again – this time about 11% – to the current level of about $2.75 per MBtu.
Well, you can expect a lot more volatility in the weeks and months ahead, as traders hash through myopic inventory reports and malleable weather forecasts.
But in the long term, natural gas prices will go higher.
How can we be so sure? Because when it comes to commodities like natural gas, supply and demand dynamics win out every time.
And right now, natural gas supplies are shrinking and demand is rising.
Let’s talk demand, first.
A Rebound in the Making
Natural gas demand is set to rise 17% by 2017, according to the latest report by the International Energy Agency (IEA).
U.S. demand will expand by 13% to 779 billion cubic meters, as power companies ramp up usage to take advantage of a fuel that’s cheaper and cleaner than coal.
Consider that in 1985, coal fueled 57% of all the power generated in the United States. That figure fell to 42% last year, and the Energy Information Administration (EIA) estimates a drop to 40% by the end of 2012.
In fact, the EIA expects U.S. coal consumption to be at its lowest level in a quarter century this year.
This shift is occurring nationwide – and it’s permanent. It’s not just the United States, either.
China, the world’s largest polluter, is also making the shift from coal to natural gas.
Natural gas consumption will more than double, surging from 130 billion cubic meters to 273 billion. And since China doesn’t have the technology or expertise to tap its own considerable reserves, the Red Dragon will rely heavily on liquefied natural gas (LNG) imports.
China already has 29 billion cubic meters of LNG-receiving capacity, with another 26 billion under construction. That will create a huge outlet for natural gas surplus that’s accumulated in the United States.
So far, only one company – Cheniere Energy (NYSE: LNG) – has won approval to build an LNG export terminal. But competitors like Dominion Resources (NYSE: D) are lined up waiting for export permits of their own. Once they’re granted, we’ll see a massive export boom, as U.S. companies rush to sell LNG to overseas markets, which in some cases are already paying 10 times more for the fuel.
Indeed, other rapidly modernizing nations in Asia and Latin America will be boosting natural gas imports, as well. In all, emerging markets will account for 69% of the growth in global natural gas demand going forward.
The question, though, is how much gas will actually be available?
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With natural gas prices bobbing at historically low levels, many producers have cut back on production. Rather than add to the supply glut that currently exists, they’ve shifted focus to oil and natural gas liquids.
Chesapeake Energy Corp. (NYSE: CHK) – the second-largest natural gas producer in the United States – said on Tuesday that it has turned off the spigot and will see a 7% decline in its natural gas production in 2013.
By the end of 2013, Chesapeake expects its natural gas production to drop by about 430 million cubic feet per day, or 14%, from its peak of 3.4 billion cubic feet per day this year.
By the end of the year, Chesapeake will be using 100 drilling rigs, the company said – only eight of which will be active. And that’s only because the company needs to meet lease obligations by having one producing well on each tract of land.
Chesapeake isn’t the only company cutting back, either.
Other energy majors, like the leading U.S. producer, ExxonMobil (NYSE: XOM), are reining in natural gas supplies, as well.
As a result, the total number of rigs drilling for natural gas in the United States stood at 495 last week – the lowest level in more than 13 years, according to Baker Hughes’ (NYSE: BHI) weekly report. That’s down from a peak of 936 reached last year. The company expects the U.S. natural gas rig count to stand at 488 by the end of 2012.
So make no mistake: With demand rising and production sliding, natural gas prices will move higher in the long term.
But here’s the best part: You can score huge profits as this rebound unfolds.
In fact, we just issued a brand-new natural gas pick in the latest issue of WSD Insider.
If you’re already an insider, just check out the August issue for this hot new pick from our Senior Correspondent, Karim Rahemtulla.
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Just sign up for a risk-free trial for WSD Insider, and you’ll get instant access to our latest report. In addition to the pick itself, Karim outlines an options strategy that can earn you even more money, so I highly recommend you do this.
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You really have everything to gain and nothing to lose.
But you have to do this now. If you wait until the rebound hits full swing, it’ll be too late.