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Natural Gas: The Commodity Everyone Loves to Hate!
The price of Natural Gas, the energy fuel which has been gaining
attention as a safe and clean substitute for nuclear power (since
disaster struck in Japan), never really recovered from the hit it took
from the Big Recession of 2008/2009. Natural Gas is the only commodity
on earth which is still trading a depression levels, while the rest of
the commodity complex is again trading at pre-crisis prices.
Everyone knows the NG story by now: a new technology Hydraulic
Fracturing aka ‘Fracking’was introduced in the NatGas market, freeing
humongous Natural Gas reserves in the American soil. The market was
flooded with gas and NG stockpiles in the US ballooned. The network
couldn’t take much more Natural Gas… at the same time a fierce recession
hit the US economy.
Abundant supply in combination with plummeting demand equals ‘horror’ in the commodity arena.
The Natural Gas price got hammered from the high 12’s to the low 2’s
USD per per million British thermal units (MBtu) within a few months: an
unseen massacre. In the following months, the price recovered somewhat,
but there has always been a lot of resistance around the $5/MBtu level.
Finally, after three years of depression in the NatGas market, things are starting to turn.
Today, the stockpiles of Natural Gas in the US are still bulging, but
the levels aren’t creeping up as fast as before. In fact, underground
storage levels are dropping below the 1 year and 5 year averages!
Via IEA:
Working gas in storage was 1,919 Bcf as of Friday, May
13, 2011, according to EIA estimates. This represents a net increase of
92 Bcf from the previous week. Stocks were 235 Bcf less than last year
at this time and 36 Bcf below the 5-year average of 1,955 Bcf. At 1,919
Bcf, total working gas is within the 5-year historical range.
And there are more signals that the supply side, which has been the biggest drag on the price of NatGas, is tightening.
The number of rigs in the US is dropping again. Baker Hughes Inc., a
top-tier oil and Natural Gas field service company, has a century long
track record of counting NG rigs. Their latest report showed US rig
count dropped to 866 last week, down 6 rigs from a week ago, the lowest
level since the end of January 2011.
Baker Hughes shows that the rig count is in decline once again.
Although fundamentals in the NG complex are changing, the bulk of
commodity analysts and energy specialists are very bearish on Natural
Gas. Of course, that’s what a 3-year long depression does to a person.
The latest survey of the CME showed that of the 17 ‘member’ analysts,
ten are forecasting a price drop, while 4 are predicting the price will
stay flat in the coming period. Only 3 pundits showed some positivism
for the future price evolution of Natural Gas.
So, Natural Gas is still the commodity everyone loves to hate,
although some research firms are starting to raise their price
forecasts. Here are the latest numbers from McDaniel & Associates, an independent Canadian oil and gas consulting firm.
In the end, the current price, taking into account the recent
fundamental shifts on the supply side, is becoming a total joke in the
recent explosive commodity environment!
For instance, if we take the energy equivalents of oil and Natural
Gas, at today’s oil price of $98/barrel, Natural Gas should be trading
around $17 per MBtu. Today, the price of Natural Gas is still hovering
around $4.4/Mbtu!
And of course, one can argue that the demand for NatGas can start to
fall again if another crisis hits. We think the contrary is more likely,
as we calculate that Natural Gas is trading at around $25.5/barrel oil
equivalent. Industrial users could start to switch to the much cheaper
Natural Gas.
Being contrarians, we are becoming very bullish on the
risk/return proposition which Natural Gas has to offer for investors.
The downside looks limited, while the upward potential is enormous. With
a pressure rising every day, even a small event can set the NG price on
fire!
We are positioning our clients in the mid- to small cap
(junior) Natural Gas segment, as we think the prices for the stocks are
currently trading at ‘rapture’ valuations! The second half of 2011 could
turn out to be quite interesting for Natural Gas investors…
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agreed, this is the opportunity of the decade, I am going to leverage my house, max the margin and get in big on this natural gas bitch....oh wait...
No really, if the US really wants got get off the black stuff, this is a great domestic alternative (and cheap) any ticker suggestions?
San Juan (SJT). Do your own DD, standard disclaimer, etc. One negative: if you own it in a taxable account, you'll be paying NM state tax, regardless of your residence. One possible positive: you'll get a depletion allowance on your taxes, but that'll be recovered if you ever sell your position.
Disclosure: I own a position in SJT.
Once you have 100 million vehicles running on NG along with thousands of power generation plants, there will be a shortage of NG and prices will skyrocket.
He just said without... Juniors
With, GASL
Low cost producers? Successful NG companies? That field should be getting pretty thinned out these days...