NEW YORK (TheStreet) -- In January on TheStreet, I cautioned that, although natural gas prices were soaring, we were heading for "a price drop for natural gas when the demand cools down as the weather gets warmer."
And now it's happening.
United States Natural Gas ETF (UNG), the main exchange-traded fund for natural gas, is down more than 5% for the last week. Southwestern Energy (SWN), a major player in the natural gas sector, is off nearly 4% for the last week due to a downgrade from Goldman Sachs. Also down 2.5% for the week with a large short float is natural gas firm Chesapeake Energy (CHK).
There are four reasons why investors should expect securities in the natural gas sector to fall even more.1. Supply and Demand In my January article, I said that natural gas prices would rise in the short term due to cold weather in the U.S. That certainly did transpire. United States Natural Gas is up more than 19% for 2014. Much of that rise was from speculators following the "hot money." From that high, it is inevitable that the price of natural gas will decline. Why? The four-year run-up was not based on the economic fundamentals of supply-and-demand that are needed to sustain an increase. 2. Substituting Coal and Alternative Energy for Natural Gas The economic principle of substitution is also forcing natural gas prices lower. Due to the four-year peak that natural gas prices hit as a result of speculation and the cold weather, usage of coal for electric utilities in the United States surged. According to data from the U.S. Energy Administration, if natural gas prices remain high, coal's percentage of power production will rise even more. And natural gas will drop in use at American power plants. It is not just coal, either: natural gas also makes alternative energy power much more economically viable, too.
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