Natural Gas ETF Future Prospects

By Gregory S. Davis | March 23, 2009 AAA

Clean energy from renewable sources like the wind, sun and ocean waves, while promising, are likely to take several years before they reach a critical mass. An alternative for investors to consider is natural gas. Yes, natural gas is a fossil fuel, but it does offer the advantage of having a cleaner reputation than oil. Let's look at how investors can take advantage of recent natural gas price declines to near seven-year lows.

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Why Have Natural Gas Prices Fallen?
In 2008, analysts pointed to additional natural gas output from a combination of overseas production and an increase in unconventional gas from shale deposits in Texas and Louisiana. Paired with a decrease in demand from the industrial sector, investors can get a sense of why natural gas futures prices fell below $4 earlier this month.

EIA Natural Gas Outlook
The U.S. Energy Information Administration (EIA) expects natural gas consumption to fall 1.3% this year and rise slightly by 0.4% in 2010. Likewise Henry Hub spot prices, which averaged $4.65 per thousand cubic feet (Mcf) in February, are expected to average $4.67 per Mcf in 2009 and $5.87 in 2010. Over the long term, the EIA expects Henry Hub spot prices (in 2007 dollars) to reach $9.25 per Mcf in 2030. (Find out how to stay on top of data reports that could cause volatility in these markets; see Become An Oil And Gas Futures Detective.)

Supporting Factors
Natural gas is not a renewable energy source, but it does offer the environmental benefits of producing less sulfur, carbon and nitrogen than coal or oil. The ability of hurricanes to disrupt natural gas production and a faster than expected recovery of the U.S. economy, which could lead to a surge in demand from industrials, are additional factors with the potential to drive prices upward.

Natural Gas ETF Options
The U.S. Natural Gas Fund ETF (NYSE:UNG) tracks the performance of natural gas prices in percentage terms. For example, when the natural gas April 2009 futures contract recorded a 13.74% increase at 5:14 p.m. on March 19, the UNG ETF followed suit, closing up 13.33% for the day. For investors more interested in investments tied to stocks, there's the First Trust ISE-Revere Natural Gas ETF (NYSE:FCG). FCG consists of approximately 30 companies related to the natural gas industry. The largest holdings in FCG include Quicksilver Resources (NYSE:KWK), Linn Energy (Nasdaq:LINE) and Petrohawk Energy (NYSE:HK). Petrohawk and Newfield Exploration (NYSE:NFX) have been the best-performing stocks in the fund, rising approximately 30% and 25%, respectively, from the beginning of the year through March 19.

Final Thoughts
Renewables are expected to represent a larger portion of the U.S. energy portfolio over the next two decades. The good news for natural gas investors is that along with coal and oil, the three natural resources are still expected to meet 79% of U.S. energy supply needs, down from 85% in 2007. Natural gas should not be the only energy source investors consider, but with prices well below forecasted future price levels, it's one option to consider. (For more, read ETFs Provide Easy Access To Energy Commodities.)

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