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A new price trend in natural gas could give investors the kinds of returns only expected from crude oil. Since mid-2007, natural gas prices started tracking the price of crude -- and if the correlations continue, investors who get in now could see new high returns. After Hurricanes Katrina and Rita devastated the U.S. Gulf Coast in 2005, the natural gas industry went on a serious drilling spree. Natural gas production spiked 2.3% in the brief span of 2005-2006, recovering mightily from the some of the worst natural disasters in U.S. history. As it turns out, natural gas explorers were only warming up. A record of number of natural-gas wells were sunk in 2006, setting a single-year record for the industry. Then in September 2007, that record was surpassed by nearly 6%. The breakneck pace continued in the deep waters of the Gulf of Mexico.
Suddenly, natural gas prices and crude prices started to track each other, as you can see in these two graphs… The biggest possible influence on the price connection may be liquefied natural gas -- or LNG. You get LNG by cooling natural gas to -163 °C and removing all the impurities, water and heavy carbons. In this new form, natural gas is liquefied and takes up about 1/600th the volume of natural gas, making it much cheaper to transport. The liquefaction process is still horrendously expensive, but the point is that LNG became a portable commodity, like crude. And unlike natural gas, LNG won’t explode in a confined environment (such as a tanker ship, truck or pipeline.) Wall Street took notice. Demand for LNG is the industry's fastest-growing sector, with growth of approximately 10% a year, according to estimates by Shell and Total. Natural Gas Investments: Natural Gas Up 29% So far this year, U.S. natural gas futures for delivery at the Henry Hub in Louisiana have risen 29% on the New York Mercantile Exchange, surpassing the 9% gain in U.S. crude prices. Whether or not these futures reach oil prices remains to be seen, but if they do, it could happen this year -- along with that big surprise, $109 oil. And as it turns out, oil may emerge as the best indicator of natural gas prices -- because looking to the past may prove fruitless. The world of natural gas has changed dramatically over the past 10 years. The huge reserves of natural gas outside the U.S. and Canada have become highly politicized, making it as combustible as natural gas itself. Like oil, many of the world’s biggest natural gas reserves reside in places riddled with violence, corruption and anti-U.S. tirades. Some of these countries may be our outright enemies, while others resort to saber rattling that instantly ignite price deviations around the world.
Natural Gas Investments: Iran, Russia and Natural Gas Iran holds 16% of the natural gas reserves, while Russia is sitting on 27%. Right there, we have 43% of the world’s natural gas held by two vicious, totalitarian regimes that either despise the U.S. or covertly support organizations committed to the destruction of our country. That in and of itself does not bode well for cheap energy here in the homeland. A further examination of the geopolitics of natural gas provides investors with a better analysis of why prices could continue to rise. Notably, the global commodities boom is rapidly creating upwardly mobile populations in countries once written off as banana republics. This demographic sweep drives up domestic use in many natural gas providers. To fill their own demand, they place curbs on natural gas exports to fuel their own economic growth. Consumption of natural gas worldwide is expected to grow from 100 trillion cubic feet in 2004 to 163 trillion cubic feet in 2030, according to the U.S. Energy Information Administration. Satisfying that demand could prove to be tricky. Natural Gas Investments: Natural Gas That Stays at Home Countries such as Russia, China, Nigeria and Indonesia are cutting natural gas exports and instead diverting them for domestic consumption. Natural gas exports are projected to decline most in countries that have shunned membership in the pro-democracy Organization for Economic Cooperation and Development (OECD). By the year 2030, non-OECD nations such as from Brunei, Indonesia, Malaysia and Myanmar are expected to cut natural gas exports from 26% to 10% as governments shift to internal use. Natural Gas Investments: Egypt and Nigeria Up the Ante in Natural Gas Likewise, Egypt and Nigeria are talking about keeping some 33% of the world’s supply of natural gas for their own use. You must take into consideration situations such as Nigeria. As the most populated African nation, Nigeria holds the continents largest reserves of natural gas -- yet only 40% of its 140 million citizens have electricity. Chevron is entangled in negotiations with Angola over an LNG venture. The issue? Angola wants to keep it in-country. The advent of LNG has opened the natural gas market to the highest bidder anywhere in the world. The terrestrial restrictions no longer apply… and neither does price ceilings. That could leave ordinary Americans out in the cold. Natural Gas Investments: Natural Gas Futures Soar Since 1999, residential natural gas prices in the U.S. soared from $6.69 per thousand cubic feet (Mcf) to $9.37 as of March 6, 2008 -- a jump of 40.1%. The biggest gains are also the most recent. The price of the futures contract for April 2008 delivery increased to $9.74 (as of March 11, 2008). A look at the chart below from the Energy Information Administration, an arm of the Department of Energy, clearly indicates natural gas prices nearly doubling this year since 1999.
Total natural gas consumption is expected to increase by 0.9% in 2008 and by 1.0 percent in 2009, according to the EIA. Certainly demand and global unrest are contributing to the higher prices. But at the same time, inventories are being tapped. The brutal winters that have hit the Northeast and Midwest this year are responsible for a drawdown of 274 billion cubic feet (bcf) during the week ending January 25, surpassing the previous record of 260 bcf set during the week ending January 17, 1997. At our current rate, U.S. demand will outstrip supply from our largest provider, Canada. By 2030, Canada’s share of gross U.S. imports is projected to decline to 25% from 85% in 2004. The million-dollar question then becomes, Can the U.S., as the largest producer of natural gas, continue to as its own primary source? Natural Gas Investments: Can We Rely on Alaska For Natural Gas? Alaska’s natural gas production is earmarked to fill America’s demand through 2030 -- at least, under the current administration. If an environmentally sensitive Democrat is elected in the oval office on November 4, everything and anything could be up for grabs. We now expect the correlations between natural gas and crude to become even tighter, adding a certain level of comfort to investors who previously steered clear of natural gas. Yet, compared to fuel oil prices, natural gas is approximately 18 cents less based on formulas used to calculate the amount of energy in each fuel. So BTU for BTU, natural gas could produce a much higher upside for investors than $109 crude moving forward. Alternative sources of energy are creating big upsides for investors, here is your chance to take advantage of these great opportunities.
Originally published March 18, 2008. More Articles About Natural Gas Investments From Taipan Publishing Group Big Profits in Natural Gas are Still Ahead The "Other" Fossil Fuel: America's True Oil Alternative Natural Gas Profits: Buy Natural Gas, Sell Hugo Chavez Useful Links About Natural Gas Investments Natural Gas Technology – Investment in a Healthy U.S. Energy Future Burma: Natural Gas Project Threatens Human Rights Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. |
