It’s been an interesting time for investors in the natural gas space. As hydraulic fracturing and horizontal drilling have become the extraction method of choice for E&P firms, production of the fuel has skyrocketed and led to a surplus of supply and high storage inventories. The huge surpluses have combined with slack demand for the fuel, causing prices to crater. At one point they were below $2 per MMBtu [for more oil news and analysis subscribe to our free newsletter].
Recently, however, conditions have started to improve for the fuel and could offer investors some “bang for their buck” this summer.
The response by various producers like Chesapeake (CHK) to curtail production and switch to more profitable natural gas liquids (NGL) and shale oil in the face of huge inventory buildups has finally started to bear fruit. Prices for the abundant fuel have steadily climbed upwards and it seems like natural gas may finally have its day in the sun. This time last year, analysts were predicting sub-$1 prices for natural gas. Today, the commodity has made a complete reversal.
So far this year, both spot and summer forward natural gas prices are averaging well above year-ago levels. That’s a good indicator that we could see natural gas surpass last year’s seasonal highs when the mercury rises this summer. Last year, natural gas prices surged by over 70% during the summer months, as an increase in air conditioning use and a switch from coal in power plants drove demand [see The World's Largest Natural Gas Producers].
Hot weather forecasts and elevated cooling demands have historically provided a boost to the natural gas market and prices during the hottest part of the year. At the same time, utilities have continued to show a fondness for the fuel as natural gas-fired power plants can be turned on and off relatively quickly. That makes these plants a perfect way to generate electricity during times of peak demand- such as during a heat wave. With temperatures starting to rise and sunshine finally beginning to make its way across the U.S., natural gas could see a repeat of last year’s surge.
This surge could be heightened due to the plethora of pipeline maintenance scheduled this summer, along with the low hydropower reservoirs stemming from the United States record drought.
Playing Natural Gas’s Summer Highs
While investors need to check the weather reports and supply data–as any bearish reports can be detrimental to prices–natural gas could be the play of the next few months. Here’s how to do it [see Chevron Looks North For New Joint Venture]:
- The United States Natural Gas Fund (UNG): This ETF seeks to replicate the performance of natural gas by investing in futures contracts traded on the NYMEX that is the nearest month contract to expire. Historically, this has been a terrible strategy as UNG has been one of the worst performing ETFs ever; however, as forward futures have flattened out, the fund has quickly become a great investment and has tracked spot prices more closely. UNG has gained about 21% this year, which is only a few percentage points behind spot gas’s 25% rise. Expenses for the UNG run 0.60%.
- First Trust ISE-Revere Natural Gas Index (FCG): It stands to reason that firms associated with the production of natural gas will benefit as prices rise. The First Trust ETF tracks the ISE-REVERE Natural Gas Index, which is an equal-weighted index that derives a substantial portion of its revenues from the exploration and production of natural gas. The fund includes all the heavy hitters like Cabot Oil & Gas (COG) and EnCana Corporation (ECA). FCG costs 0.63% in expenses.
- ProShares Ultra DJ-UBS Natural Gas (BOIL): Finally, for investors looking to get the biggest gain over the short summer months, the ProShares Ultra DJ-UBS Natural Gas could be for you. The fund is leveraged and seeks two-times the daily performance of the Dow Jones-UBS Natural Gas Sub-index for a single day. Ultimately, that leverage could be a real winner if natural gas truly takes off this summer. Investors need to be careful, however, as it can exaggerate losses as well.
Disclosure: No positions at time of writing.