Is the Market Collapse of Natural Gas Long-term?

Make no mistake; this is a market collapse in natural gas prices. The current price for natural gas is $2.72 per a million British thermal units (Btu). To give you an idea of where we’ve been in 2011, at the beginning of June, we saw prices approximate $5.00 per a million Btu. In almost seven months, natural gas prices have fallen close to 46%. This is what a market collapse looks like.

First, let’s take a quick look at why prices have fallen and then we’ll investigate what it means for your portfolio. We are in the middle of January and winter has barely touched the U.S. Of course, we will get some colder weather and snow, but the mild weather has hurt natural gas sales. This means that the inventory of natural gas in storage is being filled to the brim, and there’s only so much room to store the stuff. A market collapse occurs when there aren’t any buyers and there are more sellers. If your facilities are full, you don’t have room to buy any natural gas no matter how cheap it is. Not being able to work off inventory because of mild weather means you’re sitting with a full tank of gas.

The new shale developments are also hurting the market, because we’ve now added a lot of new supply of natural gas. The U.S. is now the world’s biggest producer of natural gas and many investors rushed into stocks hoping this new supply would push up corporate earnings. That would be true if there was a market to buy up all of this new supply, but there’s way too much gas floating around.

This is now being seen in the corporate earnings and pre-announcements by companies in this sector. It looks like we’re going to see bad corporate earnings for producers of natural gas. Firms like Cabot Oil & Gas Corporation (NYSE:COG, $66.47), Range Resources Corporation (NYSE:RRC, $54.30), Southwestern Energy Company (NYSE:SWN, $29.28), and QEP Resources, Inc. (NYSE:QEP, $27.50) all have been hit hard and have more to go. Over the next few quarters, we’re about to see corporate earnings affected by the natural gas market collapse and that isn’t about to change anytime soon.

Is there any good news because of this market collapse? Possibly; as people spend less money on heating their homes, they might take those savings and spend the money in other areas, such as on a holiday. Firms like Carnival Corporation (NYSE:CCL, $34.10) have been moving up in price lately, as some buyers are thinking the same thing.

Will it help their corporate earnings? It’s far too soon to say. In fact, considering where the economy is, I wouldn’t rush into any long-term buys of consumer discretionary stocks until we see the economy start moving up.

One company that has done well and might have better corporate earnings is Wal-Mart Stores, Inc. (NYSE:WMT, $59.21), as lower-income people who are saving money because of the natural gas market collapse might spend more in a Wal-Mart store. With the price near a 52 week high, I would wait for a pullback. With a dividend yield of 2.47%, it does look interesting; but never rush into any investment. Patience is a virtue when it comes to creating long-term wealth.

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About Sasha Cekerevac 31 Articles

Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an insider’s look at what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert.

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