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Published: September 22, 2009
Natural gas trades near historical lows and
could explode upward in the next few months, especially as
cooler temperatures begin to remind traders in New York that
winter is on the way.
Investors can buy futures or exchange-traded funds to profit
when prices rise, but there's a better long-term play.
Natural Gas Prices
Natural gas prices plunged -70% in the second half of 2008 to
levels not seen since 2002. The culprit was a drop in demand
from factories and homes, which were using less energy because
of the recession. But now, as the economy is starting to pick
up, these prices won’t last long.
One reason for that: Winter is around the corner, and that’s
when natural gas prices tend to rise. Hundreds of thousands of
homes and businesses use natural gas for heat, which will
quickly burn off the nation's almost-overflowing supply and push
prices higher.
Also, many producers trimmed production for the simple reason
that they don't want to give their natural gas away. This
completes the one-two punch -- less supply, more demand -- that
is always a recipe for higher prices of any commodity.
Futures prices show investors expect gas prices to move higher.
The current or "front-month" price for natural gas is $3.59, but
the December price is +44% higher, at $5.15, and the December
2010 price is higher still, at $6.79 -- +89% above today's
price.
The trend is clear: These depressed prices we are seeing won’t
last forever. Natural gas is going up.
The only question is how to take advantage.
A popular play is buying natural gas through an exchange-traded
fund called U.S. Natural Gas (NYSE: UNG), which tracks
the price of natural gas using futures contracts. It can be
useful to mirror short-term price swings, but it has its risks.
Funds that track commodities by buying future contracts have
come under scrutiny by the Commodity Futures Trade Commission.
At issue with commodity ETFs is their inability to track the
price of the underlying commodity over the long term. As Nathan
Slaughter, editor of The ETF Authority, pointed out, "[Ultra
Oil & Gas Proshares (NYSE: DIG)] tumbled -70% last year as
the price of oil collapsed. So you'd think a fund designed to
move in the opposite direction would have soared. Wrong.
UltraShort Oil & Gas ProShares (NYSE: DUG) actually declined
about -10% as well."
Investors who want to sidestep regulatory risk and tracking
errors can buy natural gas producers. As gas prices rise, their
profits typically follow. This strategy is more appropriate for
investors with longer investment horizons.
The best-in-show winner among gas companies is clearly
Chesapeake Energy (NYSE: CHK), the largest U.S. natural-gas
producer. Chesapeake, despite the drop in natural gas prices,
managed to increase revenue and profits in the second quarter
from its year-ago results. This impressive feat was mostly
attributable to its "hedging" program, which is meant to protect
the company from price swings. In this case, it allowed the
company to sell its natural gas above the market price.
Chesapeake, with 41,200 producing wells, has the third-largest
proven natural-gas reserves in the country, which generates
billions of cubic feet of production each day -- production that
will be worth hundreds of millions more as the price of gas
rises. --
Francisco Bermea
Staff Writer
StreetAuthority |
