NEW YORK (TheStreet) — When it gets cold, that’s the time for natural gas, as represented by the United States Natural Gas (UNG) exchange-traded fund, to get hot.
UNG has had its ups and downs this year. But here are three reasons why it should jump later as winter weather arrives.
Cold, bitter weather is predicted, just like last winter, when natural gas prices were driven higher. The Farmers Almanac “is predicting another nasty and frigid winter in the Northeast.” Last year, United States Natural Gas went from under $17 a share in November to nearly $27 in April due to “nasty and frigid weather.”
Read More: Goldman Sachs’ 50 Stocks That Matter Most to Hedge Funds
UNG stock is up only 1.59% for the year to date but down 16% for the past six months. The stock closed Wednesday at $21.02, up 10.9% over the past 52 weeks.
There is still not enough pipeline infrastructure to prevent a price rise due to increased demand.
Yes, there is plenty of natural gas in the U.S. But it is still in the ground, chiefly in Pennsylvania’s Marcellus Shale. There’s a lack of pipeline infrastructure to get it to the end user.
Of the 8,000 wells in the Marcellus Shale, which supplies 40% of shale gas production, about 3,000 are idle. About one-half of those not pumping could be put in production if the pipeline infrastructure existed to get the product to market.
Those 1,500 wells could do much to get natural gas out to consumers and companies this winter when demand spikes. But it is not going to happen this winter.
Investors and speculators will drive up the price even more, just like last winter — but with a major difference.
The change is that Big Oil is selling assets around the globe and moving prominently into the Marcellus Shale. Royal Dutch Shell (RDS.B_) , the second-largest energy firm in the world, is pulling back from Africa and other areas to go into the Marcellus Shale in a significant way.
The biggest oil and natural gas firm on the planet, Exxon Mobil (XOM_) , recently announced the leasing of 170,000 acres in West Virginia to tap into the southern tier of the Marcellus Shale formation, with more local acquisitions planned. Wood Mackenzie, an energy consulting firm, just released a report saying that there was $90 billion left to be earned in the Marcellus Shale.
Read More: Why Prospect Capital’s 12.6% Yield Is a Great Deal in a Stalling Rate Environment
Big numbers like $90 billion and big names like Exxon Mobil and Royal Dutch Shell mean even more investment dollars flowing into the Marcellus Shale. That will naturally increase the price of natural gas stocks, ETFs, mineral rights and so on, due to the fundamentals of supply and demand.
Plus U.S. homes and offices will need more natural gas for heating and power this winter, as is typical for the season.
Those two problems, plus the shortage of pipeline infrastructure, should push investors to watch for United States Natural Gas to surge by winter, just as it did last year.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet’s regular news coverage.
TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
“We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company’s strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, good cash flow from operations, increase in net income and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins.”
You can view the full analysis from the report here: XOM Ratings Report