The decline in crude oil prices may have been hogging the headlines over the past 18 months, but natural gas has been caught in an even more severe and protracted bear market. At its current price of $2.28 per million British thermal units (MMBtu), the price of natural gas has slid 85% from a peak of almost $16 reached in 2005 in the wake of Hurricane Katrina.

Since 2009, natural gas has rarely breached $6 on the upside; on the downside, while it had previously found support at the $2 level, it fell to a multi-year low of $1.61 in March 2016. Prices have remained depressed on a sustained basis because of burgeoning gas inventories on account of record shale gas production. U.S. gas inventories in March 2016 ended at 2.48 billion cubic feet (Bcf), the highest level on record at the end of the withdrawal season.

Lower crude oil prices benefit consumers and most – but not all – industrial sectors, because fuel is a major input expense for most companies. With natural gas, identifying sectors that benefit from low gas prices and those that don't is a more difficult exercise, because its use is not as widespread as crude oil and data on sensitivities to natural gas prices is not readily available. (See also: The World's Top 10 Natural Gas Companies (XOM, OGZPY).)

For example, lower natural gas prices do have a positive impact on the consumer, because they free up some discretionary income. However, this "dividend" from lower gas prices is likely to be significantly lesser than that from lower oil prices, since natural gas is primarily used for heating, and the total heating bill in a given year is generally likely to be much less than the amount spent on fuel for automobiles. However, the dividend may be greater in places where the utilities use large amounts of natural gas, as they do in the West South Central region of the U.S., encompassing Arkansas, Louisiana, Oklahoma and Texas. The National Bureau of Economic Research gauges the estimated benefit in 2013 from lower natural gas prices in the region at $432 per person annually.

Here are two sectors that benefit from lower natural gas prices – and two that don't.

  • Chemicals: Natural gas is an important feedstock for chemical companies, so lower natural gas prices have boosted margins and earnings. This boost is evident in the price appreciation of the biggest chemical manufacturers since March 9, 2009, when the bull market commenced. As of mid-May 2016, Dow Chemical had surged 700%, Eastman Chemical was up 673%, and Du Pont had gained 310%.
  • Fertilizers: Fertilizer manufacturers are the most intensive users of natural gas in the U.S. While they have gained from its low price, however, this benefit is outweighed by the slowdown in China, the world's largest importer of fertilizer. As a result, leading fertilizer makers like Mosaic Co. and Potash Corp. are down more than 33% since March 2009, although rival CF Industries has bucked the trend with a 125% increase.

Low natural gas prices have a negative effect on the following sectors:

  • Unregulated Utilities: Unregulated utilities that use natural gas for power generation are negatively impacted by low gas prices. According to data compiled by Bloomberg, the average annual wholesale power price in the U.S. Midwest grid plunged 43% to $25.80 per megawatt hour from 2008 to 2015, driven by the 85% decline in gas prices over that period.
  • Natural gas producers: Since most of the large energy names are either engaged in oil and gas exploration, or are integrated producers, isolating the effect of natural gas on their finances is not an easy proposition. However, there are some pure-play natural gas players in North America, like EnCana in Canada and Chesapeake Energy in the U.S. These stocks have slumped because the cost of production is higher than the current price of natural gas, which means that these companies lose money for every unit of natural gas produced.

The Bottom Line

Chemical and fertilizer manufacturers benefit from a low price for natural gas, while utilities and natural gas producers are adversely affected by it.

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