Natural Gas Prices Tank to Lowest Levels in 3+ Years
Investors in natural gas usually get warmed up this time of year. With winter just around the corner, thoughts of shivering consumers burning up the midnight oil is enough to get some investors excited. The current rout being experienced in the oil and gas sector is also something not even the uber oil and gas bull T. Boone Pickens could have foreseen in his natural gas forecast.
In fact, his call for natural gas prices to be at $3.00 and oil to be at $70.00 this winter is way, way, off. But with natural gas prices tanking to their lowest level since mid-2012 and the strongest El Nino on record expected to hit North America this winter, there is little reason to have a bullish natural gas price forecast in 2016. Unless you are really, really patient. And don’t mind if your money sits there doing nothing for you.
Here’s Why I’m Dialing Back My Natural Gas Forecast in 2016
Natural gas prices have tanked to their lowest level in more than three years. Since the beginning of September, the spot price for natural gas prices has fallen 13.8% from $2.68 to around $2.31. Over the last two weeks of October, natural gas prices tanked 9.2%.
Natural gas prices have been falling due to the collapse in oil prices and fears of a really warm winter, neither of which bodes well for natural gas in the near- or long-term. While some analysts are saying natural gas is a strong buy under $2.00. I’m not so sure-at least, not yet.
Natural gas drillers in the U.S. Northeast have cut production by about 900 million cubic feet per day. According to the Energy Information Administration (EIA), output from the Marcellus shale formation in Pennsylvania is expected to fall 1.3% in November to 15.89 billion cubic feet, which is the fifth consecutive monthly decline and the biggest decline since July 2014. (Source: “Short-Term Energy and Winter Fuels Outlook,” eia.org, last accessed October 29, 2015.)
Despite the cutback, natural gas supplies rose 63 billion cubic feet for the week ended October 23rd. Total natural gas stock now stands at 3.877 trillion cubic feet, up 409 million cubic feet from a year ago and 153 million cubic feet above the five-year average. (Source: “Weekly Natural Gas Storage Report,” eia.org, last accessed October 29, 2015.)
It’s not surprising then to see that natural gas exchange-traded funds (ETFs) like United States Natural Gas (NYSEArca:UNG) is down 35% year-to-date and 14% since the beginning of October.
Natural Gas Prices Go Cold This Winter
On a broad basis, natural gas has been the primary choice for heating residential properties here in the U.S., with most homes in the Midwest heated by natural gas and the Northeast increasing its dependency. Elsewhere though, electricity is gaining market share. (Source: “Everywhere but Northeast, fewer homes choose natural gas as heating fuel,” eia.org, last accessed October 30, 2015.)
The strongest El Nino on record may be welcome news for snow-hating Americans, but it’s bad news for natural gas speculators. The warm weather is expected to bring heavy precipitation to the West coast and across the South. While the East Coast and North are expected to see warmer temperatures.
The only thing guaranteed to be cold this winter is natural gas prices. Yes, El Nino could be more muted than forecast, but even a short cold snap will not unleash natural gas prices.
Granted, natural gas prices will not stay low forever; they will rebound. But many do not foresee that happening until the second half of 2016. That’s a long time for natural gas bulls to let their money not work for them.
Boone Pickens 2015 Natural Gas Forecast Way Off
It’s one thing to second-guess Mother Nature when you’re investing; it’s another to second guess energy entrepreneur T. Boone Pickens. The former is unpredictable, while the latter is always bullish on the energy sector.
Back in late April, T. Boone Pickens had a price forecast for natural gas of $3.00 by this winter. Further predicting the price of natural gas would trend higher over the following months. (Source: “Boone Pickens stands by his call that oil goes up,” CNBC.com, April 27, 2015.)
Pickens maintained that challenges with supply and demand and geopolitical tensions would send natural gas and oil prices higher by the end of this year, with oil hitting $100.00 per barrel by the end of 2016.
Yes, there are still nine weeks left in the year, but his predictions for 2015 seem wildly off. At least he put it out there and is still sticking to his predictions, mostly. It’s better than most analysts who are too afraid to commit to anything more than one week down the line.
Natural Gas Prices Set to Rebound?
Are natural gas prices forecasted to rebound? It doesn’t look like they will any time soon. But, if history is any indicator, speculators shouldn’t ignore natural gas. Those who rely heavily on technical analysis know that natural gas prices do not hover near the $2.00 to $2.50 area for very long.
In fact, over the last 15 plus years, every time natural gas dipped to the $2.00 or $2.50 level, it quickly rebounded: above $3.00 in 2001, to near $4.00 in 2002, to $6.00 in 2009 and up to $6.00 in 2012.
Chart courtesy of www.StockCharts.com
Trading near $2.30, natural gas prices could easily move lower to previous support levels near $2.00. But again, that doesn’t mean investors should turn their back on natural gas. They should put natural gas on the back burner and keep a close watch. Because when natural gas prices do rebound, they do so quickly.
I just don’t think the elements are in play for natural gas prices to experience a serious rebound just yet. Prices may be near a vector point, but correlation is not causation and there are just not enough—or any—catalysts to propel natural gas prices higher.
Those bullish on natural gas could always watch ETFs like United States Natural Gas (NYSEArca:UNG), or, if you have a high tolerance level, the VelocityShares 3x Long Natural Gas ETN (NYSEArca:UGAZ).
If you’re bearish on natural gas, you might want to consider watching the ProShares UltraShort Bloomberg Natural Gas (NYSEArca:KOLD) or VelocityShares 3x Inverse Natural Gas ETN (NYSEArca:DGAZ).