At the same time, demand for natural gas to generate electricity is likely to continue to surge as the commodity takes market share away from coal, as it's been doing for years. In 2016, utilities generated more electricity with natural gas than they did with coal the first time in history. Natural gas' 33.8% share topped coal's 30.4%. That compares to five years ago when natural gas supplied 24.7% of the nation's electricity, compared to 42.3% for coal.
Source: Energy Information Administration
Meanwhile, exports of liquefied natural gas are expected to increase almost sevenfold over the next five years to 8.5 bcf/d, according to the Energy Information Administration. That will reduce the supply of natural gas available in the U.S. market.
Long-Term Investors Bruised
Put that all together and you have a recipe for higher natural gas prices―maybe. The caveat is that people have been predicting the imminent rise of natural gas for a long time. The thesis makes sense, but every time a rally gets any traction, natural gas producers come in and flood the market with supply, pushing prices back down.
Investments in UGAZ, UNG and the equity-based First Trust Natural Gas ETF (FCG) have fared extremely poorly historically for this reason.
5-Year Returns For UNG, UGAZ, FCG
It could be that last year's 17-year low in prices was the reality check that producers needed to become more disciplined about their drilling activity, but only time will tell whether natural gas investors will finally be rewarded for buying into this promising fuel of the future.
Contact Sumit Roy at [email protected]