NatGas Investing Not For Faint Of Heart

October 29, 2015

Commodities have been doing horribly; that's not news to anyone. But in a space where prices have continually sunk to new lows across the board, one commodity has managed to outdo them all―natural gas.

The worst-performing commodity of the year, natural gas, is down 30 percent in 2015. Due to the ill effects of roll costs from contango, the United States Natural Gas Fund (UNG | B-94) has done even worse, losing 35 percent of its value.

At the same time, equities tied to natural gas have been decimated year-to-date, with the First Trust ISE-Revere Natural Gas ETF (FCG | B-95) losing a whopping 46 percent.

YTD Returns For Natural Gas Futures, UNG, FCG

Unrelenting Production Growth

The problem for natural gas is simply that the country has too much of it. Despite the fact that prices are close to the lowest levels in more than a decade below $2/mmbtu, production hasn't flinched. According to the latest data from the Energy Information Administration, output in the U.S. stood at a near-record 81.7 billion cubic feet/day as of last week, up 3 percent from a year ago.

U.S. Lower 48 Natural Gas Production (bcf/d)

To many, that statistic is confounding. Drilling activity in the energy patch collapsed during the past year due to the simultaneous decline in oil and natural gas prices. Surely that would impact production.

At least for oil, it is having an impact. Output of crude in the U.S. is down more than 5 percent from its peak levels. For natural gas, the story is obviously very different.

Large natural gas producers like Range Resources and Southwestern Energy continue to report all-time-high production levels, while calling for more growth in the future. The only takeaway is that the marginal cost of natural gas production is much lower than anyone had imagined.

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