Will Natural Gas Prices Keep Coming Down?

Tickers in this article: AEP APC CHK UNG

NEW YORK ( TheStreet) -- The natural gas market has cooled down in the past few weeks. But will this trend continue? And how will it affect leading natural gas producers?

Since the beginning of last month, the price of natural gas has fallen by more than 15%. The weakness in the natural gas market is likely to continue in the coming weeks. These losses are mostly related to the ongoing drop in demand for natural gas and the steady rise in production. Let's explore these two sides of the equation:

The demand is cooling down in the power and residential/commercial sectors, which account for 70% of U.S. natural gas consumption. Utility companies such as American Electric Power  use natural gas to generate electricity (this commodity accounts for roughly 23% of American Electric Power's fuel mix). The elevated prices of natural gas in the past several months have led these companies to use other sources of energy, such as coal.

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Moreover, the seasonal shift in the has also reduced the demand for natural gas for heating purposes in the residential/commercial sectors. So, the demand for natural gas in these sectors is likely to slowly fall in the near term.

The largest U.S. natural gas producers reacted to the news with sharp falls in their stock prices. Since the beginning of July, shares of shares of Anadarko Petroleum  lost 1.3% to $107.94 and Chesapeake Energy   was down 9.23% to $26.53. The United States Natural Gas ETF was off 15% to $21.81.

During the previous months, the production picked up, as prices rallied and reached higher-than-normal levels during the winter. The high prices have steered gas producers such as Chesapeake Energy to ramp up their production. Further, the growing output from shale formations at such projects as Eagle Ford Shale in Texas and Haynesville in Louisiana has also contributed to rising production. Looking forward, U.S. production is expected to further grow, which will slowly bring down prices in the coming years.

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In the near term, the prices of natural gas are likely to keep coming down, which will reduce the profit margins of natural gas producers in the following quarters.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates AMERICAN ELECTRIC POWER CO as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation: