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Don't Expect Higher Natural Gas Prices Soon

It's no surprise that the precipitous fall in commodity prices has also dragged natural gas along with it. Over the past 24 months, natural gas prices have shown a fairly consistent decline, with spot prices now reaching $2.50 MMBtu.

The stocks of natural gas companies have predictably had a tough time. Chesapeake Energy ( CHK ) and Southwestern Energy Co. ( SWN ) are two of the largest natural gas producers. Both have experienced significant swings in their share prices since the natural gas rout began. Both are down over 60% in the past year, erasing all of the gains investors have experienced in the past decade.

While it may appear attractive to pick up shares in these companies at multi-year lows, there's plenty of reasons to believe natural gas prices won't stabilize and rebound any time soon.

Oversupply is here to stay

Plenty of analysts are calling for a halt in natural gas price declines due to lower prices discouraging further supply gains and encouraging new demand growth. While a dramatically lower rig count may suggest that oversupply should end fairly soon, the latest data from the U.S. Energy Information Administration suggests otherwise.

Despite the rig count falling dramatically, companies have a large amount of wells in inventory that are ready to resume drilling should prices even begin a recovery.

For example, the Ohio Department of Natural Resources last reported an inventory of 596 wells, while the Pennsylvania Department of Environmental Protection reported 1,716 wells waiting to produce. Specifically, Chesapeake Energy reports 275 MMcf/d of production they currently have curtailed and awaiting completion.

Bentek Energy estimates that this total backlog represents up to 14 Bcf/d of gas production sitting in reserve. This is a major reason why the EIA expected U.S. natural gas supply to keep growing even through 2016, even with imports falling to nearly nothing.

Demand isn't spiking as many predicted

While supplies continue to skyrocket, albeit at a slower pace, demand is not picking up the slack to balance pricing. Consumption in the residential and commercial sector is actually expected to fall next year, with rising demand in the industrial sector as new industrial projects come online (particularly in the fertilizer and chemicals sectors).

Conclusion: Expect lower prices

Despite simple logic, supply continues to climb, with plenty of projects capable of starting up if there is even a whiff of higher prices. Demand growth, meanwhile, isn't materializing as quickly as many expected due to limited infrastructure. All of this results in the EIA's forecast for lackluster pricing for 2016 and beyond.

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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