The natural gas market has been an unmitigated disaster for years now. For eight years, ever-growing supplies of the fuel pushed prices lower and lower. The climax came in March of this year, when benchmark Henry Hub prices crumbled to a 17-year low around $1.61/mmbtu.
On an inflation-adjusted basis, things looked even worse. In real terms, this year's low was the cheapest price ever for Nymex natural gas futures, which began trading in 1990.
Anyone invested in natural gas, such as those holding the United States Natural Gas Fund (UNG) or the First Trust ISE-Revere Natural Gas Index Fund (FCG), was hammered. Both ETFs hit all-time lows earlier this year.
For bulls, the situation was hopeless. The U.S. had just experienced its warmest winter on record―significantly reducing demand for the heating fuel―while production stubbornly held close to record highs despite sinking prices.
Unexpected Price Turnaround
There was no reason to believe that natural gas would be rallying anytime soon. But just as they often do, prices turned around when everyone least expected it. Today natural gas stands above $3, or 90% above its recent lows. What sparked this surprising rise in one of the most-beaten-down commodities in the world?
NatGas Overtakes Coal
Out of all the factors that have driven natural gas higher in the last few months, perhaps the most important is demand; particularly, electric power. This year, demand for natural gas from power plants is up around 8%. That's on top of the nearly 19% growth that demand in this segment saw last year.
Low prices have encouraged utilities to switch from burning relatively dirty coal in favor of cleaner natural gas. In fact, this year the latter is on track to replace the former as the most widely used fuel in the country for generating electricity.