Analysts Say Natural Gas to Move Higher as Drilling Activity Plunges (UNG)

October 15, 2012 9:42 AM EDT
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United States Natural Gas ETF (NYSE: UNG) declined in early trading on Monday as the price of natural gas futures fell to $3.50 per million btu. However, analysts at Canaccord Genuity said they believe fundamentals are in place for a recovery to at least $4 this winter.

"Since the start of the injection-season, the y/y storage overhang has eroded from 900 Bcf to less than 200 Bcf largely on the back of 5+ Bcfpd stronger year-to-date gas-fired power demand. In a sub-$3 gas price environment, gas-fired power generation served as the corrective mechanism to reduce the storage surplus," said analyst John Gerdes.

Gerdes thinks power demand will wane later this year, however, gas-directed drilling overcorrected to the downside in concert with extraordinarily weak gas prices

"The E&P industry has cut gas-directed activity to 430 rigs, which is markedly below the 600-700 gas rigs necessary to maintain market equilibrium long term. Specifically, the gas market is currently 2+ Bcfpd undersupplied on a weather-normalized thirteen-week moving average basis,” said Gerdes.

He thinks there is potential for upside to his 2013 gas price forecast of $4.

United States Natural Gas ETF (NYSE: UNG) is lower by 2.6 percent early on Monday. Natural gas futures trade just below $4.50.

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