Even in the current era of fracking and “cheap gas,” natural gas prices are subject to supply and demand, and this winter’s extremely cold temperatures have led to notable increases in natural gas prices. A Citi Research report published last Friday elaborates on this theme, and argues we are likely to see more natural gas price increases before the year is done.

Based on their calculations regarding the harsh winter and natural gas consumption, Citi analysts Robert S. Morris et al announce in the report that “we are now increasing our 2014 composite spot natural gas price forecast to $4.80/MMBtu from $3.75/MMBtu.”

Natural Gas Prices

2015 composite spot forecast

Morris and colleagues, however, note that U.S. natural gas production is strong and growing, and will rapidly catch up to the dent in supplies caused by the colder-than-expected weather. Therefore, they expect natural gas prices to come back down a good bit by next year. “Thus, with full storage, next winter would start out with an even looser supply/demand balance than at the beginning of this winter and, as a result, our 2015 composite spot forecast is unchanged at $4.40/MMBtu.

Natural gas prices will increase earnings estimates

The analysts also point out that higher natural gas prices will lead to increased earnings for most companies, with the more highly leveraged companies getting the biggest bump. “The most natural gas leveraged names including hedges, and thus the largest increase in 2014 estimates, are for Rice Energy Inc (NYSE:RICE), Southwestern Energy Company (NYSE:SWN), Range Resources Corp. (NYSE:RRC), Ultra Petroleum Corp. (NYSE:UPL), Encana Corporation (NYSE:ECA) (TSE:ECA), Cabot Oil & Gas Corporation (NYSE:COG), Antero Resources Corp (NYSE:AR), Cimarex Energy Co (NYSE:XEC) and Chesapeake Energy Corporation (NYSE:CHK) (see Figure 29).”

Natural Gas EPS and CFPS

Sector recommendations

Finally, and related to the increased earning estimates discussed above, the Citi report argues that higher gas prices could lead to price increases in the range of 15% for a select group of equities in the O&G exploration and production sector. Citi’s top picks in the sector include Cabot Oil & Gas Corporation (NYSE:COG), Canadian Natural Resource Ltd (NYSE:CNQ) (TSE:CNQ), Concho Resources Inc. (NYSE:CXO), Chesapeake Energy Corporation (NYSE:CHK), EOG Resources Inc (NYSE:EOG), Noble Energy, Inc. (NYSE:NBL), Pioneer Natural Resources (NYSE:PXD), Range Resources Corp. (NYSE:RRC) and Whiting Petroleum Corp (NYSE:WLL).