Natural Gas: Bad Year, but Ready to Rebound

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"After seeing its value halved. . .the previous year, natural gas continued its downward slide in '09. . ."

For investors hoping that the steep slide in natural gas prices during 2008 would turn itself around in 2009, the year turned out to be another disappointment. After seeing its value halved from a high of just over $13 per thousand cubic feet (mcf) in the previous year, natural gas continued its downward slide in '09, touching below the $3/mcf in October, before the onset of colder weather helped it recover to around $5/mcf by yearend.

The "Widow Maker"
For investors who placed their bets on a natural gas ETF, like the U.S. Natural Gas Fund (NYSE:UNG), the pain came in the form of a near 60% loss for the year; a return that earned it the unflattering nickname "the Widow Maker."

Natgas Taps Were Opened Wide
Natural gas' failure to launch during 2009 is a classic economics lesson in supply and demand. While the recession took a huge bite out of demand, largely due to a drop in demand by energy-hungry heavy industries like steel, big natural gas producers opened the taps wide, producing as much as gas as they could, with a lot of it coming from previously uneconomical shale gas plays.

No More Storage Space
The net result of all this production was a dramatic increase in natural gas storage levels, which are 19% above their five-year averages; a level that qualifies as an all-time high for the U.S. storage space now expected to be maxed out by yearend.

Bottom Line: Prices Should Recover in 2010
With no more storage space left, the major gas producers are now being forced to cut production; a move that may actually be beneficial to the industry as a whole as it will likely help boost prices, thus restoring margins for many producers. Fresh signs that U.S. industrial demand for gas may pick up at a faster rate than expected should also boost prices. Industrial consumers account for 29% of gas used in the U.S.

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