Since natural gas prices fell off a cliff in 2008, they have
continued to descend further and further -- until just recently
slipping below $2 per thousand cubic feet (Mcf). Prices have perked
up a bit recently, but considering how far it's fallen, it's of
little comfort to investors who have tried to catch this
falling knife
.
Gas hasn't been this cheap in 10 years. The peak above $13 per Mcf
in 2008 is now a distant memory.
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Natural gas looked cheap back in January when it was trading around
the $2.50 mark. Since then, the
commodity
tumbled another 20%, with prices really nose-diving below $2.00 in
the wake of an unseasonably warm winter before picking back up to
near the $2.30 mark.
I've talked about the reasons for this historic drop before in
Scarcity & Real Wealth
, my monthly advisory. It's no mystery that heavy shale development
has unlocked vast quantities of natural gas that have glutted the
market
. But the blame for this latest downturn belongs mostly to Mother
Nature. Natural gas storage facilities typically fill up in the
fall, but then draw down in the winter as heating demand rises.
But December and January were unusually mild, so fewer homeowners
felt the need to crank up the thermostat. That shrunk the
withdrawals that are customary in winter, so we entered the spring
with a record supply surplus.
In fact, there are concerns that the nation's underground storage
capacity could be maxed out later this year. As it stands, the
latest report from the U.S. Department of Energy shows that natural
gas stockpiles rose 28 billion cubic feet in the week ended April
27 to 2.576 trillion cubic feet. For perspective, that's 871
billion cubic feet higher than this time last year and nearly 60%
above the five-year average for this time of year.
Here's the problem in a nutshell. The amount of natural gas
consumed in the United States each year has risen by 12% since
2006. But production has increased at twice that rate, climbing
24%, with output touching 63 billion cubic feet per day last year.
That dynamic is slowly starting to change. On the supply side,
virtually every energy producer large and small is cutting back or
even abandoning dry gas fields and directing drilling and
exploration expenditures toward more oil-oriented plays.
Selling gas at $2 per Mcf is a money losing proposition. But there
are several reasons to think natural gas prices are about to
reverse -- possibly in a dramatic way. Smart investors need to
position themselves accordingly.
Gas will still be produced as an oil byproduct. But this
industry-wide shift will at least help crimp the supply flow. To
speed up the process,
Chesapeake Energy (NYSE:
CHK
)
and others are actually curtailing over a billion of cubic feet of
gas production per day until prices rebound.
But it's the demand side of the equation that could really cause
prices to reverse course. Utilities and other industrial users
liked natural gas at $5 per Mcf -- at $2, they love it.
First, compressed natural gas (CNG) is rapidly gaining traction as
a transportation fuel, saving truck owners up to $2 per gallon
compared with diesel. This powerful trend is only growing stronger,
as evidenced by the 25% gain my subscribers have earned with
Clean Energy Fuels (Nasdaq:
CLNE
)
.
Meanwhile, petrochemical makers such as
Dow Chemical (NYSE:
DOW
)
are currently investing billions in plant expansions and new
projects to take advantage of cheap natural gas feedstocks. These
facilities (which represent the biggest industry spending binge in
two decades) will have a hungry appetite for natural gas once they
come online.
Perhaps most important, natural gas is displacing coal on the power
grid. Last year, the Department of Energy forecasted that 90% of
all new electricity generating capacity nationwide would be fueled
by natural gas. Since then, stringent new government emissions
standards have tilted the playing field even more in favor of gas.
[See my recent article: "
Could this be the Death Knell for Coal Stocks?
"]
Few ever thought we'd see the day where natural gas was more
affordable than cheap Powder River Basin coal from Montana and
Wyoming. But here we are. So emission standards aside, basic
economics
tells us that utilities and other power generators will make the
switch and start using inexpensive natural gas to fuel their
plants.
We may not have seen the bottom yet, but I believe the pendulum
will turn later in the year.
Beyond that, it's important to remember that natural gas isn't
plentiful and cheap everywhere. It's actually quite scarce in
Europe and sells for $10 per Mcf. And it's rarer still in Asian
markets, where buyers are willing to pay $15 per Mcf.
Right now, there is no pathway for U.S. gas to reach higher paying
markets. But exports of liquefied natural gas (
LNG
) are right around the corner. [I own
shares
of the single best stock to
profit
from this trend in
Scarcity & Real Wealth
.]
That will be a game-changer, where if nothing else,
arbitrage
will cause global prices to converge.
Within a few years, billions of cubic feet of gas that would have
been used in the U.S. will instead be diverted out of the country,
soaking up excess supplies and lifting prices. Meanwhile, the
influx of inexpensive shale gas from North America will pour into
places such as Japan, easing prices in those markets.
Eventually, the pricing gap ($2 here and $10-plus overseas) will
narrow, and the two will meet somewhere in the middle. Does that
happen at $4 per Mcf? $6 per Mcf?
I'm not sure. But I do know that it will lift prices significantly
higher than today's moribund levels.
Risks to Consider:
As I said earlier, we may have not seen the bottom yet, so
there may be some near-term pain you might have to endure if you
invest in this sector. But I'm convinced the potential rewards
greatly outweigh the risk at this point.
Action to Take -->
The best time to invest in a commodity is usually when nobody wants
to touch it -- and at $2 per Mcf, that is certainly the case with
natural gas.
I'm making a big bet on natural gas as the energy source of the
future. In
Scarcity & Real Wealth
, we own shares of natural gas producers, pipeline owners, LNG
shippers and many others poised to profit from this resource boom.
And between 15% and 20% of my personal portfolio is weighted toward
these stocks as well. To find out more about my favorite ways to
profit from the natural gas boom, I invite you to
watch this special presentation
.
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.