A positive outlook on the possiblity of Natural Gas price improvements
This Commodity Is So Cheap, You Can't Lose Money
By Tom Dyson -Daily Wealth Newsletter
Commodities have taken a beating – down 60% since last July.
But one commodity has performed worse than any other: natural gas. Since last July, the price of natural gas has fallen 75%, from $13.50 to $3.50. Natural gas is still testing new lows, while most other commodities – including oil – have bounced significantly from their bear-market bottoms late last year.
Natural gas is so cheap right now, it's not economical for drillers to bring it from the ground. Major gas producers, like Chesapeake Energy and Devon Energy, are idling rigs and slashing drilling budgets.
Last summer, when natural gas prices were at $14 per thousand cubic feet (mcf), 1,600 gas rigs in the United States were pumping gas onto the market. As of March 13, only 884 rigs were operating. This means supplies will soon start to shrink.
Meanwhile, low prices are stimulating demand. Last week, AT&T announced it was spending $565 million on 15,000 natural gas-powered vehicles. It'll save millions per year in fuel costs and earn millions in tax credits. Other companies will follow. Taxis and buses will convert next. Then, we'll see 18-wheelers begin to run on gas.
But the big driver of natural gas demand will be the electric industry. The new government is pushing alternative energies like solar, wind, and hydroelectricity and taxing traditional power industries like coal. The more the government funds alternative energy, the more important natural gas becomes to the economy.
The decline in rig counts will soon lead to a shortage of natural gas, and prices will shoot back up again... just like they always do. Seven years ago, for example, producers cut their drilling rig count at a similar pace to today's cuts. Natural gas prices rose 86% the following year.
I expect the rise in gas prices is imminent. Gas prices track oil prices. Oil has risen 43% since Christmas. Gas has to catch up. Also, speculators have bet so heavily against natural gas prices, they're breaking historic records. Right now, speculators have huge positions against the commercials (or the actual fuel users). When speculators are all on the same side of the trade, a violent reversal is near.
Here's the bottom line: When a commodity is unprofitable for producers, you need to invest in it immediately. When a commodity is unprofitable, the industry shrinks, leaving only the most efficient firms in operation. Supply collapses. Prices rise. This is what we're currently seeing in the natural gas business...
The natural gas ETF's symbol is UNG. I think this ETF is about to see a major rise. You could also look toward natural gas drillers to profit off the trend.
Natural gas may not go back to $14 per mcf any time soon... But it's so oversold right now, it would be hard to lose money buying at these prices.
Good investing,
Tom
By Tom Dyson -Daily Wealth Newsletter
Commodities have taken a beating – down 60% since last July.
But one commodity has performed worse than any other: natural gas. Since last July, the price of natural gas has fallen 75%, from $13.50 to $3.50. Natural gas is still testing new lows, while most other commodities – including oil – have bounced significantly from their bear-market bottoms late last year.
Natural gas is so cheap right now, it's not economical for drillers to bring it from the ground. Major gas producers, like Chesapeake Energy and Devon Energy, are idling rigs and slashing drilling budgets.
Last summer, when natural gas prices were at $14 per thousand cubic feet (mcf), 1,600 gas rigs in the United States were pumping gas onto the market. As of March 13, only 884 rigs were operating. This means supplies will soon start to shrink.
Meanwhile, low prices are stimulating demand. Last week, AT&T announced it was spending $565 million on 15,000 natural gas-powered vehicles. It'll save millions per year in fuel costs and earn millions in tax credits. Other companies will follow. Taxis and buses will convert next. Then, we'll see 18-wheelers begin to run on gas.
But the big driver of natural gas demand will be the electric industry. The new government is pushing alternative energies like solar, wind, and hydroelectricity and taxing traditional power industries like coal. The more the government funds alternative energy, the more important natural gas becomes to the economy.
The decline in rig counts will soon lead to a shortage of natural gas, and prices will shoot back up again... just like they always do. Seven years ago, for example, producers cut their drilling rig count at a similar pace to today's cuts. Natural gas prices rose 86% the following year.
I expect the rise in gas prices is imminent. Gas prices track oil prices. Oil has risen 43% since Christmas. Gas has to catch up. Also, speculators have bet so heavily against natural gas prices, they're breaking historic records. Right now, speculators have huge positions against the commercials (or the actual fuel users). When speculators are all on the same side of the trade, a violent reversal is near.
Here's the bottom line: When a commodity is unprofitable for producers, you need to invest in it immediately. When a commodity is unprofitable, the industry shrinks, leaving only the most efficient firms in operation. Supply collapses. Prices rise. This is what we're currently seeing in the natural gas business...
The natural gas ETF's symbol is UNG. I think this ETF is about to see a major rise. You could also look toward natural gas drillers to profit off the trend.
Natural gas may not go back to $14 per mcf any time soon... But it's so oversold right now, it would be hard to lose money buying at these prices.
Good investing,
Tom
Views: 87
Replies to This Discussion
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Permalink Reply by Anna Mauck-Member Services on -
Thanks for posting this - I love the free market. Glad to see some possible good news. What this writer Dyson is saying makes sense economically speaking, from my understanding, but I'm no expert.
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Permalink Reply by Count of Monte Cristo on
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I wouldn't exactly categorize this article as "news", it's more a plug for a natural gas ETF. I think one of the lessons learned from the financial crisis should be that we, as humans, are terrible at predictions and understanding the true probabilities of rare events. As such, we should just look at the price of distant NG contracts set to expire in late '09 or '10 as the best estimate of where NG will be at that point in time.
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Permalink Reply by Eric Camp on
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Unfortunately, I think this analyst is right and prices will stay low for quite some time.
It is true that natural gas prices have historically tracked oil prices but a big reason for this is that the supplies and demands for both commodities followed the same trends. But now, while the demand for both arfe following the same trend, the domestic supply of natural gas has increased exponentially with the shale plays - and that's not even counting the future LNG imports.
The only way I see natural gas prices rising is for domestic demand to increase (A LOT). Getting our fleet vehicles and cars running on CNG is the only proposal I've seen to make this happen.
I hope I'm wrong.
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Permalink Reply by Les Bamburg on
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Eric, actually US natural gas prices decoupled from crude in the early part of this decade as the amount of fuel-switching capability diminished under new environmental limits. Global natural gas prices still track crude due to the nature of their gas contract pricing.
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Permalink Reply by Eric Camp on
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I hope you are right and that gas prices continue to track crude. But I still think there needs to be a large increase in domestic demand for gas to handle the increase in domestic supply.
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Permalink Reply by w.r. frank on
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As I understand it, Japan and Korea (big importers on LNG) tie their long-term supply contracts to crude, but US NG pricing has been decoupled from crude for years. Certain NE markets are impacted by the price of heating oil because of substitution, but not crude which is an international market price with basis differentials (WTI, North Sea, etc).
Under some contracts Japan and S. Korea can divert shipments, which will then go to higher priced markets such as UK and Europe and then US. Demand destruction in Japan and S. Korea because of economy, plus new gasification capacity and lack of storage in Europe, are likely to cause LNG to appear in greater quantity in US this summer.
However, in Feb. the price of Russian gas delivered to the border in Germany was $14+/mmbtu so in winter it will go back to UK, Europe and Asia.
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Permalink Reply by Les Bamburg on
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Jim, the only reason for the possible increase in US LNG imports is the big drop in the global economy. If this would not have occurred, there would have been very limited number of LNG cargos brought into the US.
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