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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