If long-term investors need long-term arguments when selecting an investment, a natural gas theme might fit the bill.
Natural gas has endured tough times in recent years, as the price has subsided some 75 per cent from a euphoric spike in 2005. While the price has recently rebounded about 80 per cent from its multi-year low in April, the price is still depressed, sitting at about half the average price between 2004 and 2008. Natural gas producers have also been struggling under these conditions.
The short-term argument in favour of natural gas often revolves around weather forecasts. Particularly cold winters or warm summers can strain supplies, driving prices higher. But the bigger picture, one that looks beyond seasonal fluctuations, is what's most appealing.
John Gerdes, an analyst at Canaccord Genuity, believes that the price for U.S. natural gas will rise to at least $4 (U.S.) per million British thermal units (or MMBtu) this winter, representing a gain of about 14 per cent as storage eroded with lower gas prices. But investors might want to skip over to the longer-term outlook, which is quite fascinating.
He believes that through 2017, gas-fired power should represent nearly 80 per cent of the growth in U.S. power generation, as its market share rises to 29 per cent from 25 per cent in 2011.
The reason? Coal use is declining. He believes that the market share for coal-fired power generation will decline to 38 per cent in 2017 from 42 per cent in 2011.
"Increasingly stringent air quality regulations (especially particulate and mercury standards) and low power prices given a $3-5 (U.S.) gas price environment imply the probably continued retirement of essentially all 40+ year-old coal-fired plants, which are generally inefficient and have minimal or no emission controls," Mr. Gerdes said in a note. By 2030, he expects the retirement of about 35 per cent of U.S. coal-fired plant capacity.
He isn't alone in his enthusiasm. Bloomberg News reported on Monday that hedge funds have become bullish on natural gas, raising their exposure to rising prices by 9.5 per cent for the period ended Oct. 9. Bloomberg also pointed out that Bank of America has raised its forecast for gas prices in 2013 to $3.75 per million Btu from $3.50.
That might not sound like a big boost, but it's moving in the right direction – and it is based largely on a shrinking supply glut rather than the longer term.