Natural Gas Forecast

By Arthur Pinkasovitch | February 03, 2011 AAA

ExxonMobil (NYSE:XOM) and BP (NYSE:BP) independently released long-term energy outlooks which suggest a fundamental energy shift to natural gas. With accelerated emerging market growth amidst pressing environmental regulations for cleaner forms of energy, natural gas usage is expected to increase by an annual 2.1% a year over the next 20 years, compared with 0.6% growth in oil demand. Exxon's report confirmed a similar conclusions whereby natural gas will be the "fastest growing major energy source, overtaking coal" but falling behind oil.

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Demand
BP and ExxonMobil concluded that the global energy demand will increase by approximately 35-40% with most growth coming from non-OECD countries. Demand for wind, solar and biofuel energy sources is forecasted to show the largest percentage increase, yet these sources will only capture a relatively small segment of the overall energy market. Natural gas will make the biggest gain to capturing more market share.

Supply
Aubrey Kerr McClendon, chief executive officer of Chesapeake Energy (NYSE:CHK) refers to the 21st century as the "Age of Natural Gas". Importing foreign oil costs the United States $1 billion per day and consumption emits tons of harmful green house gases into the atmosphere. Substituting this expensive habit with utilizing the two quadrillion cubic feet of American reserves would reduce North American dependence on foreign oil and on emission-heavy coal usage. Natural gas is currently the only economically feasible alternative to coal.

Although there is an abundant supply of natural gas in North America and subsequent major findings are arising in other parts of the world such as Noble Energy's (NYSE:NBL) estimated 16 trillion cubic foot find in its Levianthan prospect, oil and gas companies continue to expect increased gas prices; Chevron (NYSE:CVX) is likely to acquire Atlas Energy (NYSE:ATLS) for $3.2 billion in order to gain access to the Marcellus Shale. Furthermore, in June 2010 ExxonMobil purchased XTO Energy, which holds 45 trillion cubic feet of gas, for $41 billion.

Price
After fluctuating in the $7 to $12 range between 2005 and 2008, natural gas prices have fallen to slightly over $4/MMBtu as new technologies have allowed access to shale formations. According to the American Natural Gas Alliance, in 2000 shale gas accounted for 1% of total supply; this figure is currently estimated to be 20% and is expected to increase to 50% by 2035. Despite future increases in demand, the relatively flat supply curve prevents substantial equilibrium price increases. As a result, investors are unlikely to realize notable profits from investing in such ETFs as the United States Natural Gas Fund (NYSE:UNG) which tracks the price of natural gas futures contracts.

The Bottom Line
Nonetheless, investors have several options available to them to capitalize on forecasted demand trends. Pure play natural gas firms, such as Encana (NYSE:ECA) typically hedge their sale price natural gas, thus boosting their bottom line in low price environments. For example, Encana hedged 2 Bcf per day at a fixed price of $6.04 per Mcf. Also, increased production volumes and improvements in operating margins can increase revenues and earnings respectively of major oil and gas companies.

BP, Exxon Mobil, Anadarko Petroleum (NYSE:APC), Chesapeak Energy, Devon Energy (NYSE:DVN), ConocoPhillips (NYSE:COP), Encana and Chevron are among the largest North American natural gas producers. (Before jumping into this hot sector, learn how these companies make their money. See Oil And Gas Industry Primer.

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