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Long-Term Outlook For Natural Gas ETFs

January 8th, 2014

natural-gas-etf2013 was choppy for commodity investors due to Fed tapering talks, strengthening dollar and continued bullishness in the stock market. Despite this sluggish trend, natural gas emerged as a solid performer, and ended the year with impressive gains of about 30%.

Whether natural gas will continue this surge in 2014 depends on the broad commodity trends and supply/demand balance.

Near Term Demand is Rising


Natural gas will likely see an increase in its prices from the chilly weather across the Midwest and East Coast to open up January. The stormy weather and below-average temperatures across various states of U.S. would boost demand for natural gas to fuel heating at homes and business. Notably, about half of U.S. households use natural gas as the primary source of heating.

Investors should note that November-March is generally the peak demand period for gas consumption in the U.S.

Falling Near-term Supply 

As per the latest EIA storage report, natural gas stockpiles fell 97 billion cubic feet (bcf) in the week ending December 27. Though this is below the analyst expectation of 126 bcf, it is much higher than the five-year average decline of 8.9 bcf. This suggests that the bullish trend might continue in the near term.

However, the continued growth in shale gas production could increase the inventories going forward which in turn result in a slide in natural gas prices (read:Play the U.S. Oil Boom with These Energy ETFs).

Long-term Also Looks Bright

According to the Energy Information Administration (EIA), the demand for natural gas will increase gradually in the coming years as this energy source will continue to replace coal to generate electricity in the U.S.

With this, natural gas is expected to overtake coal as the largest source of U.S. electric generation by 2040. Natural gas usage will increase to 35% of total electric generation while coal usage will drop to 32% in 2040. Further, EIA expects the U.S. to become a net exporter of natural gas by the end of 2016 thanks to booming production.

Moreover, natural gas will be used as an alternative fuel for new power generation plants over the coming years, thereby leading to increased demand for the commodity.

ETFs to Consider

Based on the current trends and promising long-term growth outlook, natural gas could continue its winning streak to start 2014. Given this, we have highlighted some of the most popular ETFs for investors seeking to tap the surge in the commodity.

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