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11/12/2012 4:00:00 PM
Anyone searching for long-term gains in natural gas has been through an epic journey in the past year or so. From January 2011 to April 2012, natural gas prices fell an astounding 80%, dragging energy stocks down to new multi-year lows and creating big losses for many energy investors. Take a look at its descending trajectory in the chart below...
But even though on the surface this may look like a colossal failure, the reality is that this decrease is actually a reflection of the industry's success. Energy companies were so successful at extracting more gas from the ground that themarket simply became oversupplied and prices crashed. It's simpleeconomics . The supply/demand imbalance was exacerbated by an infrastructure that hasn't fully migrated to a wide-spread natural gas consumption.
But now, after a tough year and half for natural gas and energy stocks, the tide has begun to shift. After falling to a four-year low below $2 in April, natural gas has quickly ralliedback up 25% in the past six months. Take a look at the extended move lower and recent rebound...
Rising prices or even price stability will have a positive effect on the energy industry in general. Old natural gas projects will consequently become more profitable while new projects will have less risk of reporting losses. In the meantime, as more electric utilities convert from coal to natural gas , the manufacturing infrastructure will start to increasingly demand more natural gas.
But the recent jump in natural gas prices is just a shadow of what's about to happen.
Simply put, the United States could soon become the new Saudi Arabia of the world in terms of energy production. In fact, The Associated Press just released a new report predicting the United States could soon pass Saudi Arabia as the world's largest energy producer because of its huge oil and natural gas reserves, and growing production capacities.
The Department of Energy is forecasting that U.S. production of crude and otherliquid hydrocarbons, including biofuels, will average 11.4 million barrels per day next year. With Saudi Arabia projected to produce 11.6 million barrels, it's a virtual dead heat between the two countries. Further down the line, Citibank is projecting domestic production levels of 13 million to 15 million barrels by 2020, which would potentially be enough to dethrone Saudi Arabia as the energy king of the world.
If this prediction proves correct, then North American energy stocks will likely be in position for huge gains. There will be many different sectors and trends toprofit from, but six stand out as the defining forces of the booming energy industry in the years to come.
Risks to Consider: The regulatory environment will play a critical factor in new drilling permits and total production levels. Although permits are back on the rise in the Gulf of Mexico, access to additional domestic energy resources in Alaska and the East Coast is still in question.
Action to Take --> In spite of the recent bounce, natural gas is still trading at historically low levels. Energy stocks look the same, trading near multi-year lows in spite of strong earnings and cash flows. This makes this the perfect time to take a serious look at the group and select your favorite stocks. Everyone is fearful of energy stocks now, so it's time to be greedy and jump in ahead of the crowd.