The Natural Gas Forecast for 2018 anticipates oversupplied markets despite rising demand. Production growth is expected to outpace demand, adding downward pressure to prices that have already fallen significantly. This article will show you step-by-step how to use this information to profit this year, and for years to come.
Natural Gas Futures just saw a massive correction on warmer than expected February temperatures and weather forecasts anticipate more of the same. In this article, we give the play by play and actionable advice on what you should be doing about the correction now.
Natural Gas Price Prediction is not as hard as you might think. Natural gas prices tend to follow a seasonal cycle that savvy traders take advantage of. Read this article to learn more about it and what’s driving prices today. As an added bonus, we include our three (contrarian) natural gas plays for 2018. Click Here To Go Straight To Our Top Natural Gas Picks
What is the Natural Gas Forecast for 2018?
The natural gas inventory forecast data shows high supply and rising production continue to dominate the market. High prices are bringing more drillers to the market, adding to supply and putting downward pressure on prices. The good news is that lower prices bode well for the broader economy. The bad news for drillers is that low prices are expected to impact their bottom lines and therefore decrease share prices.
The latest EIA (Energy Information Administration) Natural Gas Weekly Report shows average daily supply running at 83.9 billion cubic feet, up more than 8.65% from the previous year, and expected to grow annually over the next four years.
This high level of natural gas supply is driven primarily by rising rig counts. Drillers have been in recovery since energy prices hit their bottom in 2016, and there is still no end in sight. Natural gas prices are averaging well above levels where drillers can profit, and that is attracting more of them and leading current operations to bring more rigs online.
Rigs come online as prices rise, and when prices are at their highest even the less efficient operators are able to make money. The Baker Hughes rig-count report shows the most significant jump in production rigs in over a year for the third week in February. A sign that today’s prices are more than high enough to ensure supply will continue to dominate the market.
Low Storage Inventory Is A Concern, But Not A Big One
Inventory storage levels are a concern that could lead to rising prices, but our forecast says otherwise. Storage levels are nearing their second-lowest level in eight years, but mitigated by this year’s bitterly cold weather. Net withdrawals over the past few weeks have exceeded those during the same period last year because of increased demand for heating fuel. The caveat is that the record cold which caused those drawdowns of inventory was followed by a heat wave that has caused the excess demand to evaporate.
Bullish investors would point out that storage levels are near long-term lows, driven by record drawdowns of storage inventory. What they will not tell you is the lows are seasonally expected and unseasonably large due to this year’s record-setting cold. They’ll also leave out the fact rig activity was impacted by the same cold, negatively affecting production levels which further affected overall supply.
Production, storage, and inventory levels are all important metrics to watch. Signs of rising production, high storage or rising inventory are all signs of high supply and bearish for prices.
Weather plays a significant role in the price of natural gas, far more so than with crude. The number one use of natural gas is for heating, which means demand is high in the winter months. Because most of the world’s population is located in the northern hemisphere, this means the time from October through April will see the highest demand. With this in mind, it makes sense that prices would naturally rise in the winter and fall in the summer, and that those swings could be accentuated by unexpectedly cold or warm weather.
While the US has seen some unseasonably cold weather for the first half of the winter, it is not expected to carry through into the end of the season. With that in mind, inventory levels should quickly rebuild. Production is at an all-time high, so there is no reason to expect that it won’t.
Natural Gas Futures Chart; Prices Have Begun To Correct
The natural gas price forecast for the next six months is down. Price decreases are expected due to supply/demand imbalance. Supply is high, and with the warmer weather already in the forecast, supply is only expected to increase, and prices have already begun to correct.
The natural gas continuous contract shows prices fell more than 27% during February, confirming a key resistance level at $3.65 per million BTU. The natural gas forecast long term is a little different, expect trading ranges to dominate once the near-term corrective action is over.
The Natural Gas Futures Forecast also suggests lower prices in the coming months. According to data from the EIA, the Henry Hub, as well as the NYMEX, spot prices are averaging $0.02 higher than the March futures contract. A year ago, just prior to a 30% run-up in prices, spot natural gas was trading $0.09 higher. A lower price for futures is indicative of an expectation for lower prices in the underlying commodity the same was higher prices for futures foreshadowed rising prices in the second half of 2017.
The $3.65 resistance was set at the height of the natural gas rebound, more than a year ago, and has only been tested once since that time. This test resulted in a massive sell-off that was driven by two factors. On the one hand was rising production and supply, and on the other was the idea that higher prices will bring even more production online than what was already being reported.
This Is How We Think You Should Trade Natural Gas
Natural gas is now trading above a support target, but one that looks ready to break. The supported target is just above $2.60 and has been tested four times previously, defining the lower boundary of a 14-month trading range. If this boundary were to break, the potential for lower prices grows exponentially. Technical targets for the break are near $1.50, another 38% lower, and likely to be hit within weeks if not days of the movement’s beginning.
Natural Gas Forecast Long Term: Ample Supply
The International Energy Agency sees natural gas demand slowly rising into the near future, but at a rate below production growth.
The US is driving supply growth and leading a transformation in the market. The US is expected to become a net exporter of energy, to include natural gas, by 2022.
Natural gas demand is expected to grow by 1.2% annually until 2022, according to the IEA. This growth will be led by China as it transitions from coal to a cleaner and more efficient means of fueling its rapidly growing economy. The primary driver of consumption growth will be the industrial sector as demand for power shifts to natural gas, and this demand will attract new producers, fueling the ongoing supply glut.
Natural Gas Futures Action Items:
Opportunity across the natural gas complex from the drillers, the mid-stream pipeline operators, shippers, and retailers. These businesses will experience high demand in a growth market that will lead to increased profits for them and their shareholders.
The US is expected to lead the charge in natural gas production this year. Production at the Marcellus Field is projected to increase by nearly 50% in the next four years. The Marcellus Field, the US largest shale gas formation, is located in the northeastern section of the country spanning most of West Virginia, Pennsylvania, and New York.
By 2022, the US is projected to account for more than a fifth of total world capacity, and 40% of the world’s excess capacity due to the expansion of the shale industry, including the Marcellus Field. This is excellent news for the US economy as it replaces many lost coal jobs while creating many new ones. It will also spur economic growth across many sectors including both steel and transportation.
Production will be boosted by rising efficiencies, which will in turn, lead to a downturn in the number of operational rigs. This will not be a sign of declining production, however, as the US is expected to rival both Qatar and Australia for dominance in the LNG export market, keeping prices low in the long term. Qatar and Australia are the benchmark for LNG production. If the US can keep costs low, it will be able to grab more market share.
According to the EIA, US production is expected to increase more than 9% in 2018, to 80.3 bcf/daily from the 2017 average 73.6 bcf. This would be a new all-time high following the new high set in 2017 and leading into another year of record production in 2019. The agency projected spot prices averaging $3.34 per million cubic foot at the beginning of February, but that target is high in light of the late month sell-off.
Looking forward, the EIA predicts average prices near $3.20 for all of 2018 and $30.8 for 2019, near the bottom of an 8-year trading range, but we think those estimates are high.
With rising production outpacing demand, we expect prices will decline further in 2018 before rebounding later in the year. The daily chart of the natural gas futures continuous contract shows an asset consolidating at what might become a support level, but doing so below $2.65 and the previous target for support. If prices are not able to regain the upper side of this price level, they will turn into new a resistance level and provide additional downward pressure. A move below $2.50 would confirm resistance and break support, sending the pair to seek more sustainable prices at lower levels.
Natural Gas Price Prediction: Our Top 3 Stocks For 2018
With the outlook for crude oil and natural gas so different, it is often advantageous to differentiate between the two when investing. By separating the two investors can take advantage of opportunities in different markets and gain an element of diversification within their portfolio. What follows here are three natural gas pure-play investments with a positive outlook for future earnings. What they all share are solid balance sheets, plans for CapEx expansion, projections for double-digit production growth, and historically low share prices.
#1 Southwestern Energy Company (SWN)
Southwestern Energy Company is located in Houston, Texas and operates in two distinct natural gas regions; the Marcellus and Fayetteville, as well as some oil and gas formations in Louisiana, Colorado, and Canada. Proven reserves are over 6.2 trillion cubic feet of natural gas, with gas accounting for more than 92% of production and 95% of reserves.With nat gas trading near $3.00 that’s over a billion dollars in untapped wealth.
The company recently announced plans to reposition its portfolio which has piqued investor interest. The company says it is actively exploring strategic alternatives for its holdings in the Fayetteville Shale region which are intended to unlock shareholder value. Strategic alternatives aimed at increasing efficiencies and reducing costs, using capital to pay down long-term debt, and using other alternative methods in order to increase shareholder value are also on the agenda. The stock is now consolidating near historic lows, near $3.50, and viewed as a value-play.
Revenue has already begun to grow, up more than 50% YOY in the last report, and we expect that to continue as the industry grows and strategic plans bear fruit. Technically speaking the stock is extremely oversold and forming a bottom. Our 12-month price forecast is $7.50, more than double today’s value.
#2 Gulfport Energy (GPOR)
Gulfport Energy is an independent drilling and exploration company operating in the Utica Shale Play in Appalachia. The company had reported reserves of 387 million barrels in oil equivalents that has since been increased. Production is focused on gas, about 86% of production, but other liquids are also recovered. The company recently issued guidance and operational updates that are expected to deliver returns for shareholders in 2018 and beyond.
Since then, the company has announced $935 million in CapEx and buyback plans intended to boost shareholder value and total operational capacity. Management expects 2018 production to grow nearly 19% over 2018 and continue to grow in 2019 as 20 newly started well projects reach completion. The stock fell on the news, possibly because the most recent quarter saw production up more than 60% YoY making current guidance weak by comparison. In any event, shares are trading near 10-year lows and a bargain for investors looking to gain natural gas exposure.The company has substantial earnings regardless of the estimates and has a strong chance of beating what are now low-ball projections. Even without that, earnings are expected to grow over the next four years at least. Our 12-month forecast for this stock is near $24.
#3 Range Resources Corporation (RRC)
Range Resources Corporation is a larger player in the natural gas space with operations in nearly every major shale play in North America. The company is based in Fort Worth, Texas and has over 12.1 trillion cubic feet of proven reserves. The company focuses on the Marcellus and Terryfield Shale plays with about 65% of total production devoted to natural gas. Unlike the other two, it pays a dividend yielding about 0.60% with shares trading near $13.00.
Over the last month, the stock has sunk to a 12 year low on what analysts have called an “underwhelming” outlook. This outlook includes annualized production growth near 13% through 2022 with production up nearly 30% in 2018. Analysts downgraded the stock on slowing growth despite the strength of growth remaining. The news sent shares down by more than 10% providing a historical entry for value investors.
The entire sector is poised to grow sharply over the next four years, and this is one of the best companies in the lot. The recent downgrades were given because growth isn’t expanding, not because it isn’t there, and has provided a contrarian opportunity for savvy investors. Along with that, it pays a dividend for added income. Our 12-month price target is near $24, nearly double today’s prices. With production expected to increase over the next four years, and demand in place to use it, there is no place for this stock to go but up.
Natural Gas Forecast; A Balance Of Price And Production
It’s no secret that higher prices are a two-edged sword when it comes to the energy market. Rising prices will attract new production, new production meets demand, demand is sated, and prices decline until production declines.
The great thing for patient investors is that natural gas is cyclical. Its price has a natural tendency to rise in the fall as the winter heating season begins and then fall in the spring as heating needs diminish and production ramps up. Looking forward, we can expect to see that cycle continue, and right now prices look ready to fall.
The risk for investors is simple, if rig counts fall and production begins to drop off, we can expect to see prices for natural gas form a bottom. Until then, expect to see rising production outpace demand and drive prices to new lows.
The floor in prices may be as low as $2.26/mcf, a price level the EIA gives a 95% confidence rating, but only out to May. The natural gas forecast could be lower by the middle of the year. A move below $2.26/mcf would be very bearish and likely take spot prices to $1.65/mcf before it’s this price correction is over.