There are seven main reasons for the volatility of natural gas stocks. However, even with this volatility, there are some ways that investing in natural gas can lead you to long-term gains from a sector that is often considered a hedge against inflation

Successful energy stocks tend to lead technological advances. For instance, advances in gas drilling technology have helped bring huge new supplies of natural gas to the market. The new technologies make it possible to vastly increase oil and gas production, even from deposits that were once considered worthless.

Even so, the price of natural gas stocks is highly volatile, and influenced both up and down by a wide range of factors. So it’s a bad idea to base investment decisions on predictions of future natural gas prices, because these predictions are simply not reliable.

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Supply and demand trends in natural gas stocks

Natural gas demand is rising due to the strengthening global economy. At the same time, though, shale gas discoveries continue to increase supply. Shale gas is trapped in rock formations. To extract it, producers pump water and chemicals into the rock. This fractures the rock and releases the natural gas.

Gas production is also growing as a by-product of drilling for more profitable crude oil and natural gas liquids, such as propane and butane.

One potential source of new demand for natural gas in Canada is liquefied natural gas, or LNG. However, LNG production is unfolding slowly, and will need time to have an effect on the prices of oil and gas stocks. Meanwhile, we advise against going overboard in the many companies that stand to profit. We do feel you should hold on to the oil and gas stocks we recommend as buys in our newsletters; they will be among the first to gain from future shipments of LNG to Asian markets.

The movement in price of natural gas stocks

You can profit nicely over long periods by investing in well-established or well-managed companies that are active in businesses that involve highly volatile commodities like oil and gas. You profit all the more if you buy these companies when they are cheap in relation to earnings and assets.

7 factors that drive the price of natural gas stocks up and down

1. If natural gas prices don’t move up, energy companies will have less incentive to drill for natural gas. That will lead to lower supplies and, in the long run, higher prices.
2. Many manufacturers and utilities are able to switch back and forth between using natural gas, oil and electricity. If oil gets cheaper than natural gas, this would in turn lower demand, and prices, for natural gas.
3. Seasonality: In the summer, prices could jump if it’s an unusually hot summer. This leads to greater demand for natural gas-generated electricity for air conditioning, or in the event hurricanes were to disrupt production. Hurricane season can last until the end of November in some parts of North America. An unusually mild winter can lead to lower withdrawals of gas from storage, leaving very high levels of inventory at the end of the heating season. High production levels brought on by continued record drilling activity have also pushed prices down.
4. Around 60% of U.S. homes are heated with natural gas, and the clean-burning energy source is also used to generate electricity, another popular heating method. Most new electricity capacity brought on line right now is generated by natural gas, rather than oil, coal, water or nuclear power. Also, as the price of crude oil increases, or remains high, some industries switch to natural gas. This leads to more demand, which could cause the price of natural gas to rise.
5. The price of natural gas could decrease even further if the U.S. federal government continues to remove various regulatory barriers to exploration and development in areas of the U.S. such as Alaska, on wildlife preserves and on federal lands.
6. Natural gas can be cooled into a liquefied form and transported by tanker. The U.S. at present has only limited capacity to import liquefied natural gas (LNG). However, as the technology of LNG liquefaction and shipping continues to improve, and if safety and environmental restraints recede, the U.S. could gain access to abundant supplies of gas from countries such as Russia.
7. Natural gas is produced around the world, but the simplest way to transport gas is through a pipeline. Canada, which supplies around a sixth of U.S. consumption, is the main source of imported gas for the U.S.

Resource stocks like natural gas stocks, though volatile, tend to rise with inflation

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising in conjunction with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Natural gas investing can be controversial, particularly when it comes with environmental concerns. How do you determine the best resource sector investments for your portfolio?

Investing in natural gas can be a risky endeavour, but it also has potential for long-term profits. What do you look for when you invest in natural gas stocks?