Natural Gas: Morgan Stanley's 2018 Outlook

Oil prices have drifted higher in the second half of 2017 on news that OPEC extended its production cut agreement into 2018. While things may be looking up for oil investors, natural gas investors could be in for another tough year in 2018. 

The Analyst

Morgan Stanley analyst Devin McDermott reiterated his long-term price projection for natural gas of $2.75. (See McDermott's track record here.) 

The analyst lowered price targets on the following five natural gas stocks:

• Antero Resources Corp AR: Equal Weight rating, target dropped from $22 to $20.
• Gulfport Energy Corporation GPOR: Underweight rating, target dropped from $13 to $11.
• Range Resources Corp. RRC: Equal Weight rating, target dropped from $18 to $17.
• Southwestern Energy Company SWN: Underweight rating, target dropped from $5.50 to $4.
• EQT Corporation EQT: Equal Weight rating, target dropped from $64 to $63.

The Thesis

Increasing productivity and efficiency and the rise of renewable energy will continue to pressure gas prices in the long-term, McDermott said. 

A bet on natural gas is a bet against innovation, he said. 

“While we remain bearish over the medium- to long-term, we continue to believe that short term prices (winter 2017/18) have overcorrected modestly to the downside." 

In the near-term, Morgan Stanley is predicting gas prices will likely bounce to the $3.15 level through the rest of the winter before sliding back to an average price of $2.90 in 2018 and then drifting lower to $2.80 in 2019.

Among exploration and production companies, he said Cabot Oil & Gas Corporation COG is Morgan Stanley's top stock pick, while Gulfport Energy and Southwestern Energy are its least-preferred names.

Price Action

Here’s a look at how popular natural gas ETFs were trading on Wednesday following the bearish Morgan Stanley note:

• United States Natural Gas Fund, LP UNG was down 0.5 percent.
• VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index UGAZ was down 2.2 percent.
• VelocityShares 3X Inverse Natural Gas ETN linked to the S&P GSCI Natural Gas INdex DGAZ was up 2.2 percent.

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