Friday, June 19, 2009

What is Holding Back Natural Gas?

Natural Gas has been a hot trade as the whole commodity complex has be semi-re-inflated (the cause is still up for debate). But while crude oil prices have moved significantly off their earlier lows, Natural Gas prices haven't done much. Everyone knows the positives: 1) Its domestic; 2) Its cleaner than many other fossil fuels; and for traders 3)Its still relatively cheap and could spike due to an uptick in demand and/or a strong storm season.

While Natural Gas (and when I speak of natural gas, assume I'm talking about UNG the vehicle most use to trade gas) has been a popular trade and has seen massive volume, it hasn't really gone anywhere. The problem is supply.

The amount of natural gas available for production in the U.S. has soared 58% in the past four years, driven by a drilling boom and the discovery of huge new gas fields in Texas, Louisiana and Pennsylvania, a new study says.

The report, due to be released Thursday by the nonprofit Potential Gas Committee, concludes that the U.S. has 2,074 trillion cubic feet of natural gas still in the ground, or nearly a century's worth of production at current rates. That's a 35.4% jump over the committee's previous estimate, in 2007, of 1,532 trillion cubic feet, the biggest increase in the committee's 44-year history.

Gas drillers have been shutting off wells at a swift pace after a record amount in 2008, but it still hasn't done enough to slow supply enough.

Long term, this is good for our energy plan though. Natural gas can be used to generate electricity and power vehicles. Our current means of doing this are much dirtier and will likely come under scrutiny from Washington.

For investors, it means that demand is likely going to rise, but not until the economy is stronger. Other countries are relying on natural gas and learning how to find it as well, which has only added to the increased supply. I keep hearing how people want to be "loading up" on UNG because its going much higher soon. I don't disagree, but the timing is the key. It may take a couple of years before prices move much higher. Even though your investment will likely be in good shape, it could be "dead money" for awhile.

That's my take on this debate. I do want to own UNG as I believe in the whole thesis, but this is why I haven't been rushing into it. For now, I'm content to pick up shares when they trade on the low end of their current range, and sell when they appreciate a few percent.

Disclosure: none

No comments: