After a sustained plunge, the 2013 natural gas price forecast shows the six-and-a-half year bear market may be finally coming to an end.
In all, over the course of the current downturn, natural gas prices declined from a high of $15.78 per million btus (mmbtu) in Dec 2005 to a low of $1.90 in April 2012 — a breath-taking nosedive of 88%.
The reason was an enormous supply glut driven largely by major new unconventional shale plays like the Marcellus and the Bakken where hydraulic fracturing (fracking) has revolutionized the industry.
In fact, fracking helped drillers to produce over 24 trillion cubic feet of natural gas last year, with over 70 billion cubic feet coming from the Bakken Shale alone.
These new finds meant the U.S. natural-gas market was flooded with an average of three billion cubic feet more natural gas every day than the United States consumed.
But those days are coming to an end as supply and demand begin to balance out, setting the stage for rising natural gas prices.
In fact, natural gas prices have already rallied to $3.40 per mmbtu, up 79% in just six months
But regardless the day-to-day movements, the long-term outlook for natural gas prices remains bullish, particularly in light of a steady increase in demand.
Why Natural Gas is Still Cheap
You may already know that the U.S. sits atop one of the world's most impressive reserves of natural gas.
It's so big it's enough to satisfy all of America's energy needs for more than 100 years.
But what you may not know right now is that despite historically oil prices, natural gas is still selling near its lowest price of the last twenty years.
Even at $4 per mmbtu, natural gas is still dirt cheap-especially compared to oil.
That's because historically, oil and natural gas have a 10-to-1 relationship. That means it usually takes about 10 units of natural gas to buy one unit of West Texas Intermediate crude oil.
That ratio reached an all-time high of 55 in at the low in April. And even now, the latest price rally has driven this ratio to just 25. Even at those levels, that's an enormous spread that simply cannot last.
For instance, if oil prices simply stay steady, a return to the historical average would see natural gas prices more than double. Even at $80 a barrel, natural gas prices should be $8 per mmbtu on a historical basis.
And there is reason to believe the supply glut will soon be a thing of the past.
A Higher 2013 Natural Gas Price Forecast
Ultra-low natural gas prices make shale gas uneconomical and have forced companies to cut production.
But they overshot the mark.
"Gas drilling has overcorrected to the downside…the industry has cut to [about] 450 rigs, which is markedly below the 650-675 gas rigs necessary to maintain long-term market balance,"Canaccord's Genuity's John Gerdes told Forbes.
That leaves the U.S. undersupplied by 1.5 to 2 billion cubic feet per day, assuming we have normal winter temperatures, Gerdes said. Last year was the warmest heating season on record.
Colder temperatures will drive up natural gas demand this winter, the Natural Gas Supply Association said Oct 3. Demand will rise to 83.8 billion cubic feet per day, a 7% increase over last year's usage.
Altogether, natural gas inventories can be expected to decline to 3,500 Bcf by November 2013, the same level as November 2008, when natural gas prices were above $7.
With storage levels falling and robust demand putting a floor under prices, natural gas should average $4 per mmbtu in 2013, Goldman Sachs Group Inc. (NYSE: GS) predicts.
Increasing demand… less supply…it all adds up to a high natural gas price forecast.
Big Players Make the Switch
But there are other reasons natural gas will continue to surge – it's cleaner burning than coal and easier to transport.
In fact, electrical utilities and trucking companies are already switching from coal or diesel to natural gas.
For instance, American Electric Power Company Inc. (NYSE: AEP) has burned a quarter less coal in the past four years, while doubling its natural gas use.
And just last week, Caterpillar Inc. (NYSE: CAT), the world's leading manufacturer of construction and mining equipment, announced it was going "all-in" to produce natgas-fueled equipment and engines.
"Large engines are going gas," said Joel Feucht, Caterpillar's director of gas engine strategy. "It's not debatable."
Waste Management Inc. (NYSE: WM), for one, is part of the larger trend. It says 80% of the trucks it purchases during the next five years will be powered by natural gas.
In this case, the writing is already on the wall – the U.S. is switching to abundant natural gas to help solve its energy problems.
How to Invest Higher Natural Gas Prices in 2013
When it comes to natural gas, it's important that investors take on the long-term view recognizing that more and more, the U.S. will rely on this cheap energy resource.
But it's unlikely investors will see natural gas prices skyrocket because producers will open the taps as soon as they see prices start to stabilize.
In fact, the market has already had a good run, so you should be cautious here.
But make no mistake — there's so much momentum behind the trend that investing in the right natural gas companies will eventually pay off in spades for patient investors.
With that in mind, here's one way to play higher natural gas prices. It's a company called Linn Energy LLC (Nasdaq: LINE).
Linn Energy is an independent oil and natural gas producer with energy assets spread across the central U.S. The company's assets include proved reserves of approximately 3.37 billion cubic feet of oil equivalent, having a reserve life of more than 18 years.
But here's the thing.
Linn has 100% of its natural gas production hedged above $5 through 2017, guaranteeing price protection and predictable cash flows for the next five years.
On top of that Linn is paying out a healthy 6.9% yield and sports an ultra-low P/E of 8.95, making it one of the must-own natural gas stocks for 2013.
Another is AGL Resources Inc. (NYSE: GAS), the largest natural gas distributor in the Southeast and the Mid-Atlantic.
The company has 80,000 miles of pipelines along with a huge customer base of 4.5 million.
AGL leverages that tremendous base into vast profits by signing its clients to fixed-rate programs, which eliminates price volatility.
That's good for customers… but it's great for AGL.
The company was founded in 1856, and has a market cap of $5 billion, so you know it's not going anywhere. But it's also growing like gangbusters, posting quarterly revenue growth of 82% with a healthy 18% operating margin.
Better yet, AGL's high margins allow it to pay a rich dividend of 4.5%.
AGL is one of the lowest-cost and most diversified utilities, with great prospects for boosting earnings per share– great for new investors.
Get ahead of the market now before higher gas prices in 2013 bring higher share prices.
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