Panic is taking hold across the country.
Natural gas futures just hit a three-year low.
This time a year ago, investors were licking their chops at the thought of higher natural gas prices.
But now, investors in the sector are panicking over the possibility of natural gas prices dropping below $2 per thousand cubic feet (mcf) again.
Readers should hold steady, though. Things may not be as rough as they seem.
Recovery on the Way
The cold winter of 2013 was the perfect environment for natural gas, pushing prices above $6 per mcf for a short period of time.
That price point didn’t last, though, and we noted that, at the time, options players were betting prices would head even higher to $10 or $11.
It was a one-sided parabolic move from the $4s to the $6s in a matter of weeks. A 50% move in a commodity that’s nothing short of plentiful proved to be a good opportunity to sell.
But today, we’re back to the $2.50 level, thanks to a weak energy sector and gluts in oil, coal, and natural gas.
And these low prices are making investors antsy. You’re probably wondering if you should jettison a natural gas position, add to a position, or maybe even initiate a new one.
Well, here’s the skinny: Natural gas is here to stay. Prices will recover in the next up cycle, which will come sooner than most people expect.
Till Death Do Us Part
You see, natural gas is still the fastest-growing fossil fuel in the world. And its properties make it less polluting than oil and much cleaner than coal. But… it still has to compete with both as energy sources.
With oil prices at half the levels they were this time last year, and coal prices falling off a cliff, the job of growing natural gas usage has become more difficult in the short term.
In fact, a lot more supply has come on board as a result of the oil collapse, as drillers are now capturing and selling natural gas produced in drilling operations instead of flaring the gas, as they have done in the past.
Cash is tight, and even selling gas at $2.50 per mcf is better than nothing.
What investors are forgetting when they’re selling natural gas holdings, however, is that conversion from one fuel to another is not an easy task.
For example, once a power plant switches to natural gas from coal, it can’t just flick a switch and turn back to coal. Or if a diesel truck is replaced by one that runs off compressed or liquefied natural gas, for instance, it can’t fill up with diesel.
And it doesn’t just stop there, either…
Pollution-Driven Demand
Several countries, like China, are moving to adopt natural gas faster as a result of the massive pollution that comes from burning coal. They just can’t get natural gas fast enough!
The Russians, who are itching for foreign currency and trade partners, recently signed an agreement to supply the Chinese with natural gas for the next 20 years. Those exports will begin in the next few years.
The United States is on the verge of exporting its first major shipment of liquefied natural gas later this year or in early 2016, despite being a net importer of gas. That’s because it’s more profitable to sell gas offshore to foreign countries that need it than to sell domestically.
So, perversely, we can buy cheap natural gas from places like Canada, while at the same time exporting the same thing at higher prices, in liquefied form, since we have the ability to do so via ocean-going tankers.
The future exports of natural gas, combined with the growing adoption of natural gas power from sources like power plants, consumers, and vehicles will continue to eat into supplies.
Lower prices will begin to force some players back out of the business or to change their focus to more liquids, as was the case with Chesapeake Energy (NYSE:CHK) (CHK).
This will ultimately be bullish for natural gas prices and producers. But, just like crude oil, the future highs in prices will likely be much lower than most believe, as there’s no shortage of natural gas.