Should You Buy Natural Gas Futures amid COVID-19?


Apr. 22 2020, Updated 11:10 a.m. ET

So far in 2020, Henry Hub natural gas active futures have declined 16.8%. The United States Natural Gas Fund, LP (NYSEARCA:UNG) invests in the Henry Hub futures contract. UNG has also fallen 19% year-to-date.

Usually, gas prices follow oil prices. The negative WTI (West Texas Intermediate) crude oil prices in the past few trading sessions might explain the downtrend in Henry Hub futures. However, gas futures are far from entering the negative price zone. On Tuesday, Henry Hub active futures settled at $1.82 per MMBtu (million British thermal units).

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Will the demand rise?

The COVID-19 outbreak has forced millions of Americans to stay home. With the pause in the economic activity, WTI prices entered into negative territory. However, gas is an important fuel for power producers in the US.

In 2019, based on the EIA (U.S. Energy Information Administration) data, natural gas-fired power-plants produced around 38% of the total electricity in the US. Also, in the last few years, natural gas has replaced coal as an important fossil fuel for power plants.

In the spring season, gas prices usually decline due to lower demand. We might see a surge in demand when the summer starts in June. Currently, with millions of Americans confide to their homes, natural gas demand might be higher compared to the past few years.

However, due to lower oil prices, oil producers might reduce the supply, which would also impact natural gas supplies. These factors could lift gas prices despite weaker oil prices.

Should you buy natural gas futures?

The volatility in Henry Hub gas prices might concern investors. However, you could look for natural gas-weighted stocks like EQT (NYSE:EQT) and Cabot Oil & Gas (NYSE:COG). So far in 2020, EQT and Cabot Oil & Gas have risen 42.8% and 20.8%, while the Energy Select Sector SPDR Fund (NYSEARCA:XLE) has fallen 46.2%. The companies have also outperformed the S&P 500 Index’s (NYSEARCA:SPY) 15.3% decline this year.

Among the 16 analysts tracking EQT, 63% recommend a “strong-buy” or “buy,” 31% recommend a “hold,” and 6% recommend a “sell” based on Reuters data. EQT’s mean target price for the next year is around $11.68. On Tuesday, EQT closed at $15.57.

Similarly, most of the analysts tracking Cabot Oil & Gas recommend a “buy” or a “strong-buy.” On Tuesday, Cabot Oil & Gas closed 4.6% above analysts’ mean target price of $20.1.


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