The last decade has been especially tough for companies focused on the production of natural gas (NYSEARCA:UNG). What is regarded as one of the cleanest fossil fuels has been caught in a prolonged slump of epic proportions since the global financial crisis of almost a decade ago.
Even the conditions that caused prices to spike over $5 per million Btu in early 2014 failed to last and natural gas plummeted to under $2 per million Btu in early 2016.
The outlook for natural gas according to some analysts remains bleak because of a massive supply overhang, growing activity in the shale energy patch and fears that demand will remain low over the short-term. Nonetheless, natural gas has firmed of late and is now trading at just under $3.19 per million Btu and should rise further over coming months with one key catalyst acting as a powerful long-term tailwind.
Natural gas is the preferred fuel for electricity generation
A major tailwind for natural gas that some analysts tend to ignore is climate change. Fears over the impact of global warming on both the environment and global economy have led to a significant push over the last two-decades to reduce greenhouse gas emissions.
The latest treaty on climate change is the Paris Agreement which came into force on 4 November 2016. The agreement seeks to strengthen the response to climate change by keeping the global temperature increase to below 2 degrees Celsius above pre-industrial levels.
It is this along with national initiatives from a range of governments that has seen the push to boost the contribution of sources of renewable energy to the global energy mix and reduce the world’s carbon footprint.
This has triggered a surge in investment in renewable technologies over the last decade, as the graphic highlighting the new investment in renewable sources of energy shows.
Source: Bloomberg New Energy Finance.
This culminated in a record $285 billion being invested in renewables in 2015, although investment during 2016 declined by 18% year over year. This can be attributed to a cooling of renewable energy investment in China with Beijing focusing rationalizing the national power grid and reforming the electricity market so that existing power generating plants can work to their full potential.
There is also the impact of natural gas to be considered with it fast becoming the favored transitional fuel for electricity generation.
You see, electricity generation is the single largest producer of carbon emissions globally responsible for over 40% of all carbon emissions. This is because of the reliance on coal-fired power plants which are responsible for over 40% of the world’s electricity. Coal is the dirtiest of all fossil fuels and it is for this reason that globally there has been a dramatic shift away from using coal to natural gas fired electricity production.
Because of its high-energy content compared to other fossil fuels natural gas burns far more cleanly, which according to the…