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Published: July 6, 2010
Careful what you wish for. That's the
hard-learned lesson gleaned by investors and industry executives
seeking their fortune in natural gas. Just a few years ago, they
wished to find more natural gas in the ground and under the sea
bed. They did, hitting mother lode after mother lode. Now, we're
awash in natural gas and a glut has led to a sharp slump in
prices.
Could that slump be coming to an end? A host of factors are
lining up to help boost demand and possibly curtail supply of
this relatively clean burning energy source.
If you live in the Northeastern United States, then you can
already guess what Factor No. 1 is. Furnace-like conditions are
leading to a sharp spike in electricity usage. Several long-term
weather forecasting services predict temperatures will stay
above average clear through the end of August. If that's the
case, the amount of natural gas in storage could start to come
down quickly and that should start to provide a tangible lift to
prices.
Factor No. 2 relies on the "bath-like" conditions of water
temperatures in the Gulf of Mexico. Meteorologists have noted a
strong correlation between water temperatures in the Gulf and
strong hurricanes. And based on that, they think that we'll be
in for a doozy of a hurricane season. The peak of storm activity
is expected to begin in a few weeks and last into October.
Recall that in 2005, hurricanes Katrina and Rita caused natural
gas prices to soar, as a good deal of production was taken
off-line. The Department of Energy estimates a median 166
billion cubic feet of gas production could be lost during the
2010 hurricane season -- nearly three days of domestic supply.
Factor No. 3 is more of a wildcard: the Obama administration has
disappointed industry watchers for failing to provide a greater
boost to natural gas-powered vehicles. But the industry isn't
waiting around. Honda (NYSE: HMC) already sells natural
gas vehicles, Fiat has announced plans to do the same with the
next generation of Chrysler cars and trucks, and major fleet
operators such as UPS (NYSE: UPS), FedEx (NYSE: FDX)
and AT&T (NYSE: T) are quickly converting hundreds of
vehicles to run on natural gas. Where will they fill up?
Clean Energy Fuels Corp. (Nasdaq: CLNE) is building natural
gas fueling stations. If natural gas can secure a reliable role
as a transportation energy source, then prices would likely find
a floor solidly above current levels.
Supply restraint
For natural gas producers, a re-balancing of supply and demand
can't come fast enough. Even though they were sitting on
newly-discovered massive energy fields, they steadily throttled
back production in a bid to keep a lid on supply. Trouble is,
demand also dropped, and many of the natural gas fields that did
come online produced a lot more gas than expected. But it's only
a matter of time before the restraint pays off. Natural gas
fields have a finite shelf life and eventually yield smaller and
smaller amounts of gas. As older wells get depleted, total
output should drop, allowing prices to rise back up.
You get a sense of
the anticipated
supply and demand
trends by looking at
futures prices.
Contracts for
delivery of natural
gas that expire in
August have already
risen from around
$4.15 per thousand
cubic feet to a
recent $4.81.
Looking out 18
months to January
2012, those same
contracts go for
around $6. Current
prices likely
account for Factor
No.1 noted above
(warming summer
weather), but if the
second and third
factors cited above
come into play,
natural gas futures
contracts could
quickly move toward
the $8 mark.
Action to Take
--> There
are a host of ways
to play the
resurgent natural
gas sector. The
U.S. Natural Gas
Fund (NYSE: UNG),
at a recent $8, is
up roughly $1 from
the spring, yet
nowhere near the $60
levels seen just a
few years ago when
natural gas was
trading in
double-digits.
Or you could buy a
basket of natural
gas plays through
the First Trust
ISE-Revere Natural
Gas Fund (NYSE: FCG).
The index fund
carries fees of up
to 0.60% and
concentrates on
firms that are
mostly exposed to
natural gas prices.
A number of energy
firms have exposure
to both and oil and
gas, and would not
rally as sharply in
an environment of
natural gas prices.
For investors
looking for high
reward with high
risk, can check out
Chesapeake Energy
(NYSE: CHK).
Chesapeake employs a
hefty amount of debt
leverage, which
really hurt the
company when gas
prices slumped, but
would magnify
earnings if prices
were to rise.
-- David Sterman
Staff Writer
StreetAuthority |
