Commodities haven’t been the favored asset class for quite a while – not since the collapse of the commodity super-cycle, and certainty not with slowing global demand. As the Federal Reserve delayed the rate hike that was widely expected to take place this year, the U.S. dollar’s long standing as a dominant currency and infallible asset class is beginning to falter. A drop in the dollar could be the catalyst that sends commodity prices higher.
The Contrarian Philosophy
Energy prices already have begun to recover from earlier lows as supply finally falls in line with global demand. Oil has been trading in the $45 to $50 range over the past couple of months, indicating it has seen the most of its downside, and should start seeing some growth again soon.
For the natural gas market, though, there is evidence of a strong bullish move before the end of the year. Demand for natural gas is beginning to build again, following a natural cyclical pattern during the colder season, and could have an exaggerated upside pop thanks to an extended period of weakness that has kept prices low.
According to the latest report from the EIA (U.S. Energy Information Administration), total U.S. natural gas consumption for 2015 should average 76.5 bcf (billion cubic feet) per day compared to 73.1 bcf per day last year. The higher demand for power is largely expected to come from the industrial and electrical sectors, with demand from the power segment to grow 15.6% in total for 2015.
Positive natural gas storage data also should contribute to the rise in prices toward the end of the year. However, natural gas remains at very low price levels. In 2008, natural gas traded at around $13.50 per MMBtu and currently trades around the $2.50 per MMBtu range. But those extreme lows could act as a tightly wound springboard to send prices much higher over the next couple of months.
The Bottom Line
Natural gas and coal have a long-standing inverse relationship. Natural gas is quickly replacing coal as the dominant energy commodity as a low-cost substitute with which coal simply can’t compete. The U.S. also is the lowest-cost natural gas producer in the world, which should help drive the industry forward.
If we take a look at how coal has been performing, it’s no surprise why natural gas prices should be headed higher. The same Short-Term Energy Outlook EIA report that showed growth in natural gas reveals a coal market caught in a serious depression. Growth is estimated to fall in all coal-producing regions, with a total decline of 89 million short tons (MMst) in U.S. coal production for 2015. As coal drops, natural gas rises, making it a bear market for coal stocks, but a bullish one for natural gas.
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