Oil has been the headline in the energy industry for nearly two years now as the battle between OPEC and other oil producers, like U.S. shale, continues to rage on. Overproduction has been the order of the day for OPEC countries who are seeking to drive their competitors out of the industry by keeping oil prices as low as possible and cutting off any profits other producers might be seeing.
In all the chaos, investors seemed to have forgotten that other energy sectors have been experiencing changes of their own. The natural gas industry could be a place of opportunity for investors, especially considering how undervalued it is right now.
Natural gas prices have fallen precipitously this year–down around 16%. In an effort to curb losses, US natural gas production has dropped for the past two months. New entrants into the energy space, like shale, have caused problems for the natural gas industry which has struggled to properly predict the availability of resources in order to gain price stability.
But the industry has always been known for its capricious movements. Many factors can affect prices including the weather–something that can’t be reliably predicted or hedged accurately. But most analysts do agree that prices are unsustainable as they are and have nowhere to go but up as the year goes on.
What Lies Ahead for Natural Gas
According to the U.S. Energy Information Administration, the U.S. is the top producer of petroleum and natural gas hydrocarbons for 2015, passing both Russia and Saudi Arabia. The energy battle could be nearing its end soon though. The EIA went on to say, “Saudi Arabia’s total petroleum and natural gas hydrocarbon production rose by 3% in 2015. Still, the United States produced more than twice the petroleum and natural gas hydrocarbons as Saudi Arabia produced in 2015.”
Furthermore, natural gas is the fastest growing fuel source in the world and demand is expected to steadily climb over the next couple of decades. OPEC may have accidentally armed the U.S. with all the tools it need moving forward as well as improved technologies and new innovative cost reduction initiatives have made these companies leaner and able to profit even during difficult economic environments.
Higher natural gas prices will be welcomed with open arms by companies like Southwestern Energy (SWN) which would see profits triple from just a $1 increase in natural gas values. Any company that exports natural gas should be setup for the new trend so companies like Exxon Mobil (XOM) and BP (BP) which already have a diverse business model should see higher earnings almost as soon as prices begin to rise.
The Bottom Line
As we head into the summer months, the energy industry tends to see cyclically higher demand which could help natural gas prices break out of their lull. The recent announcement by the Fed indicating that a rate hike may be around the corner should also been a boon to the industry. It’s a signal that the economy is growing faster than expected and demand for goods and services should head higher as a result. We could see natural gas prices began to take off if rate do actually jump next month.