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Six reasons why natural gas is better investment than oil
- Reserves deplete faster than oil (in general)
- Oil/natural gas ratio: the price of oil divided by the price of natural gas is at an all-time high (or close). This ratio stands at over 20 (historically it has been at about an 8 or so). Natural gas prices will go up, oil will decline, or both.
Also, natural gas is not a good hedge against the declining dollar (it is for the most part a domestic commodity) and storage capacity is more limited, thus not as admired by speculators as oil. This explains in part why it lagged the the spectacular performance of oil of late.
- At $3, natural gas it is uneconomical to develop and look for new reserves.
- No OPEC competition, LNG (liquid natural gas) imports are uneconomical at these prices.
- Politically more favorable than coal.
- After emission caps are implemented natural gas will become a cheaper alternative than politically and environmentally unfriendly coal.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles my email, click here.
Its simple guys - a wave of bankruptcies is coming up in the nat gas sector. Price will stabilise and start rising Ks increase. Buy UNG and short equities of at-risk companies. Easier said than done haha.. One thing is for ure - who is going to bail out the nat gas companies ??
http://www.rigzone.com/news/article.asp?a_id=79414
http://www.rigzone.com/news/article.asp?a_id=77675
"In Exxon's case, valuable liquids also produced in its Qatari projects take the market break-even price of the natural gas itself "towards zero," says Deutsche Bank analyst Paul Sankey. Factoring in processing and shipping costs, that gas can be landed in the U.S. for less than $2 per million British thermal units, reckons Noel Tomnay, head of global gas at Wood Mackenzie."
Just sayin...
http://www.rigzone.com/news/article.asp?a_id=79414
http://www.rigzone.com/news/article.asp?a_id=77675
"In Exxon's case, valuable liquids also produced in its Qatari projects take the market break-even price of the natural gas itself "towards zero," says Deutsche Bank analyst Paul Sankey. Factoring in processing and shipping costs, that gas can be landed in the U.S. for less than $2 per million British thermal units, reckons Noel Tomnay, head of global gas at Wood Mackenzie."
http://seekingalpha.com/article/144774-was-last-week-s-wilt-a-start-of-t...
"Coincidentally, our friend and Director of Research for Investment Management Associates, Inc., Vitaliy Katsenelson, sent me this email on Friday (June 19):
LOL
Well, at least he's consistent.
this article reminds me of the type of articles that are frequently posted at Seeking Alpha - When I first learned that ZH would be featuring/publishing other people's articles I was concerned that it would devolve into an SA kind of a situation but for the most part I have been pleasantly surprised by the quality of submissions here at ZH -
let's see, one commodity's price is controlled by a cartel and the other by supply and demand and I am supposed to believe there is a magic ratio?
100% agree!
Buy low, and sell high! All it needs is a bit colder winter.
agreed - this is a very poor analysis
Tim Knight weighed in today on UNG
http://slopeofhope.com/2009/08/the-new-widowmaker.html
"A week or two ago, someone here published an outstanding article about why even those who thought natural gas was going to move higher shouldn't touch UNG with a ten-foot poll. It seems that advice was well-founded. People keep trying to catch this falling knife, and it seems to have no bottom at all."
Vitaliy!!! some of your articles are reasonable and well thought out. others... kinda suck. this one sucks. others have pointed out the specifics already so i won't belabor them, but you sound like a washington post staff journalist trying to cover this topic. please do more research next time.
As a long time energy trader there is no reason why the ratio can't go to 30 or 40 to one we seen energy relationships flip in the past (Henry Hub Canadian Basis switched back in the 90's never to come back). The fuel switching that use to occur between distillate fuels and natural gas is tapped out, so we cannot expect an incremental increase in nat gas demand as a substitute to distillate if oil prices go higher. Nat gas has no geopolitical risk. Regarding LNG a Canadian consortium is looking to build and "Export" LNG facility off the coast of BC. Not a vote for medium-long term price strength.
That proposed BC LNG facility, it is for export to Asia, where the LNG market is big; Apache is one of the big E&Ps to supply NG that they're currently pulling out of their Horn River Basin project.
And while there's no geopolitical risk here, NG has geopolitical risk in Europe.
http://www.dailywealth.com/index.asp?subscribed=yes
1. correct, but the replacement cycle is much faster as well.
2. This ratio is completely meaningless; many a quant fund wishes they knew this now. They are not interchangeable commodities and do not hold a true ratio value. The amount of switching capability is no more than a daily rounding error.
3. A very untrue statement. Do more research into this, as exploration costs have fallen considerably (they are not static and fall when rig counts plummet like they have). Something else to think about is the forward curve on the NYMEX futures strip, a producer can sell >$5 gas starting in January, for many years out, which locks into quite a profitable rate of return.
4. also untrue. LNG can be profitable at a dollar in some instances; it is a by-product of oil production and would get flared off without capturing any cashflow at all. I think developement of new projects at <$3 is what you mean.
5. True, but will take years to actually realize anything meaningful from politics into true supply/demand
6. Many coal contracts are "take or pay", and run for long durations; coal will be burned far longer than you can imagine for this very reason; on-site storage space gets maximized and there is no other place to put it, therefor you burn it or pay for it anyway.
Now, I'll add a fact for you on natural gas pricing. If we do not get a COLDER THAN NORMAL WINTER this year, a carryout of >2 TCF will crush prices far greater than what we have witnessed thusfar; leading to many E&P shakeups/debt defaults. This is the first time I have ever witnessed an absolute necessity for a colder than normal winter to avert a real disaster for this industry.
By year end, wellhead supply will be down 4.5-5.5 bcf/d from 12/08. Rig count is way too low to meet anything more than a 0.5-1.5bcf/d growth in demand in 2010. Demand will increase substantially due to shift from oil and coal and economic expansion. Long-term, I'm not so confident, but NG is a good long position to have between now and Q4 2010, in my humble opinion. Take a look at FCG, avoid UNG.
Insightful reply - the initial "analysis" was obviously shallow in the extreme, but your post correctly identifies the points of failure. I've been involved in investing in NG in the San Juan basin for more than 30 years (among other things) and the initial advice is pure crap.
Yeah, there's almost a desperate vibe going around related to meteorological forecasts. A position that *relies* upon unusual weather needs to be reconsidered.
Just in case anyone is thinking of jumping into a long position in one of the pure-play ETFs (GAZ, UNG), be aware that these things are in limbo at the moment and trading at a big premium due to the actions (or lack thereof) of the CFTC. Last I checked UNG was at a 20% premium with approval to issue shares (but holding off). Going long into that is kinda like putting a loaded gun to your head and applying light pressure to the trigger.
Another thing to consider is that oil is pumped up due to speculation whereas gas prices (which took a 10% hit today) are more aligned with market realities. People seeing the historically massive divergence between oil and gas prices assume, reasonably fairly, that there will be a return to normal at some point. Sure, but it may well come from oil plummeting to $20-$30 rather than a huge move up in gas (hard to see given the surplus injection: this is what you're up against http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html).
In the medium to long term, absolutely agree with the author, a nice hedge is long gas, short oil. But in the short term, gas still has some downside risk, I wouldn't be surprised to see it hit $2.
Disclosure: short UNG (for now).
If you want to invest (rather than speculate) in NG, you might want to do what I did: buy GMXRP, which are GMXR preferred stock shares sold on the exchange and very liquid. That way you get a nice, fixed dividend independent of the price of NG (unless the company goes broke) and also pick up any appreciation from the price of NG itself (with the obvious possibility of price declines as well). I bought at $10, get a 15% dividend, and the price has risen to $20, while pure-play NG has been sliding. I'm not making any predictions, just pointing out there is more than one way to invest.
Vitaliy, NG is so in over abundance and too many
large players are hedged into 2010-2011. Haynesville and
Granite Wash plays are massive with marginal wells at 5cf EUR
and great wells 10BCF +. Zero risk involved - all shale plays
are becoming cheaper and cheaper to drill horizontally.
Remember gas companies were profitable at$2.50 gas so more pain for the service companies.
You will get CWC in haynesville and pinedale at $1.50 sothey will still be able to money with low gas prices.
Electricity demand is down and we now realize maybe we
have overbuilt electricity generation.
Coal still cheap as can be and there will be ZERO impact
with watered down cap and trade.
I will get excited for NG when large NG companies esp the serial acquirers go bankrupt.
NOT EVEN CLOSE - lower prices for NG will be the norm.
Keep up the good analysis and I like your pieces.
We will still use coal. We will have no choice. Not to detract from your argument (which still holds in the near term).
www.EnergySolution.US