Why natural gas demand in the power generation sector has slowed down down

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Recent natural gas demand trends

Natural gas is a clean-burning energy fuel used for heating, cooking, and electricity generation. In the U.S., it’s primarily used as a source for electricity generation, and it competes with coal, which is also another major source of electricity generation.

A lot of gas was used over this winter heating season, which caused prices to spike and inventories to decrease. The U.S. Energy Information Administration (the EIA) stated that the total consumption of natural gas in 2013 was 71.4 billion cubic feet per day (Bcf/d), a 2% increase over 2012, and natural gas in storage as of March 2014 was 826 Bcf.

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Large withdrawals led to high natural gas spot prices, which have remained volatile in the last few months. The EIA expects that the Henry Hub natural gas spot price, which averaged $3.73 per MMBtu in 2013, will average $4.44 per MMBtu in 2014. Because of higher natural gas prices, the power generation sector anticipates less demand this year, as coal prices are cheaper relative to natural gas prices this year compared to prior two years, causing power producers to switch to coal. To read more about this, see the Market Realist series Why coal producers like Arch Coal will benefit in the near term.

However, U.S. natural gas demand is still expected to continue to grow, given industrial, residential, and commercial demand, which would offset the declines from the electric power sector. The EIA expects total natural gas consumption will average 72.1 Bcf/d in 2014, an increase of 0.7 Bcf/d from 2013.

Higher U.S. demand is a positive for natural gas prices. This is positive for upstream names such as Chesapeake Energy (CHK), Southwestern Energy (SWN), and Range Resources (RRC), which are all part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Investors can also gain natural gas exposure through the U.S. Natural Gas Fund (UNG). To learn more about different ways to invest in natural gas, please read Market Realist’s Popular ways for investors to play natural gas prices.

 

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