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One of the most popular questions among energy investors this year is will natural gas prices keep rising in 2013, or will their price climb come to an end?
We asked Money Morning Global Energy Strategist Dr. Kent Moors for the scoop.
Natural gas has been one of the few bright spots in an overall negative year so far for commodities.
NYMEX futures are trading at $3.65 per million BTU. Although off its high for 2013, this price is nearly double the low natural gas hit on April 12, 2012 at $1.87 per million BTU.
Moors said natural gas has higher to go in 2013. In fact, Moors forecast earlier this year the price would rise to as high as $4.65 per million BTU by October.
Drilling giant Halliburton (NYSE: HAL) shares Moors’ bullish outlook. A few months ago, Halliburton CEO Dave Lesar said that he anticipates natural gas prices rising to above $4, which in turn may reinvigorate the company’s gas drilling business next year.
The Main Reasons Why Natural Gas Prices Will Rise in 2013
One reason Moors cited for his rosy outlook on natural gas prices is the fact that gas companies are focusing on their cost structure.
Over the last year of low natural gas prices, companies have reduced the number of opens or expansions of drilling pads, which should cap the amount of natural gas hitting the market. Even Halliburton says it anticipates no increased gas drilling activity for this year.
Another main reason for higher natural gas prices is the switch to gas from coal in power generation, triggered by looming regulation in the energy industry.
The Obama administration is in part behind the increased use of natural gas as a “transition fuel” toward the renewable energy era and away from hydrocarbons. In a recent climate change speech at Georgetown University, President Obama further underscored that he thought the United States should strengthen its position as a top global natural gas producer.
And this controversial proposal will help the United States reach that goal…
President Obama has a proposal that centers around directing the Environmental Protection Agency to implement tough, new carbon emissions rules for both new and existing power plants. More than 100 gigawatts of coal-fired generation capacity would be retired by the end of this decade as a result of various proposed EPA regulations, Moors estimates.
While the regulations have yet to be implemented, the move from coal-fired power generation to gas-fired has already begun, which will have a positive impact on natural gas prices.
Natural gas-fired power plants accounted for 77% of all new power generation in the United States from 1990 and 2011. The power generation sector could by a further 25% by 2040. Most of that will be gas-fired power, according to the U.S. Energy Information Administration’s latest annual outlook on natural gas.
The end result is that more natural gas will be required to fuel those power plants. For every 10 gigawatts of power that’s eliminated, 1.2 billion cubic feet of natural gas daily will be required daily to replace it, Moors estimates.
The Impact of Exports on Natural Gas Prices
The second key factor helping us answer if natural gas prices will rise in 2013 is the buzz phrase of 2013: Liquefied natural gas (LNG).
LNG exporting will kick off a new era in energy with the United States as a major natural gas exporter.
LNG exports won’t begin in the U.S. until next year at the earliest. But the U.S. will likely become a significant player in the global LNG business, perhaps accounting for 9% – 10% of total worldwide LNG trade, Moors says. The Energy Information Administration expects LNG exports from the U.S. to hit 1.6 trillion cubic feet per day by 2017, making the U.S. a large net exporter, which would most likely increase natural gas prices.
The EIA points to Mexico as a key market for U.S. gas exports. U.S. exports of natural gas to Mexico rose 24% last year to 1.69 billion cubic feet per day. This is the highest level since record keeping began in 1973. Gas exports to Mexico should more than double over the next few years. Some in the industry even think that Mexico will soon absorb 10% of U.S. gas production.
Investing in Rising Natural Gas Prices
The easiest way for investors to play the macro factors and resulting upward bias in natural gas prices is through exchange-traded funds (ETFs).
The most liquid of the available ETFs is the United States Natural Gas Fund L.P. (NYSEArca: UNG). The management expense ratio is 0.60%.
Its entire portfolio consists of natural gas futures. Currently, the fund holds NYMEX and ICE natural gas futures that expire in August. The fund ‘rolls’ outward the futures it has every month. Will natural gas prices rise? Investors who think so may want to explore these ETFs as good plays.
Get Moors’ full outlook on why natural gas prices will rise in 2013 here.
- Money Morning:
Why I’m So Bullish About Natural Gas
- Money Morning:
Five Reasons Why Natural Gas Prices Will Continue to Rise
- Source One:
AEO Release: Long-Term US Natural Gas Outlook
- Breaking Energy:
Outlook Brightens for US Natural Gas, But Not Until 2014
- NPR.org – Pennsylvania:
Obama Touts Role of Natural Gas in Addressing Climate Change