Price Outlook for Natural Gas

Why 2009 Could be a Banner Year for Natural Gas
A Taipan Publishing Group Strategy Report
by Justice Litle, Editor, Safe Haven Investor

It's been a rough year so far for oil and gas prices. In addition to the credit crisis and the October panic, that's one of the reasons Master Limited Partnerships (MLPs) have gotten so cheap. Some investors are concerned that if energy prices fall too low (and stay down too long), MLPs will see their revenues impacted; and payouts might have to be cut.

These fears are overdone, I believe. Most MLPs are well run and in fine shape to keep up distributable cash flow. But looking at a natural gas chart, you can see where the concern comes from.

As with crude oil, natural gas has been crushed these past few months. After peaking just above $13.50 per MMbtu (10K British thermal units), natural gas prices fell more than 50% at one point to a low of $6.62 per MMbtu.

Lower energy prices have been a boon to consumers — but chances are, they won’t last. That’s potentially bad news for your heating bill, but good news for MLPs.

There are at least three reasons why natural gas prices could come roaring back in 2009. You could say they all have to do with temperature: While it looks like we could be in for a cold winter, consumer demand and political trends are heating up.

Crank Up the Thermostat

For the Canadian Farmers Almanac, “numb” is the word that best describes the winter outlook for 2009. Temperatures are expected to be well below average for most of Canada, with January and February predicted to be the coldest months.

The U.S. Almanac predicts much the same, with two-thirds of the country in for a colder than average winter. “Not that there won’t be warm days,” says meteorologist Michael Schlachter, “but the number of times people will have to turn on their heat from mid-October to mid-December will be much more than they usually have to do.”

If we do see a cold front sweep in, natural gas prices could spike in short order. This is due, in part, to the increased volatility of natural gas storage levels.

When a seemingly large buffer of natural gas builds up in storage, traders get comfortable; and the market relaxes a bit. But a big enough temperature drop can cause surprisingly fast drawdowns, depleting storage levels very quickly.

The storage swings are, in turn, at least partly due to the housing boom. Thanks to the real estate frenzy of recent years, millions of Americans have “traded up” to homes with larger square footage. Those bigger homes take more effort to heat when the cold sets in. The combo of more rooms, larger rooms and higher ceilings adds up.

Add together an outbreak of McMansions with the possibility of prolonged low temperatures, and natural gas prices could skyrocket.

Ahead of the Curve in Utah

Say what you will about Utah, the state likes to do things its own way. An area where we’re seeing that now is in the state’s enthusiasm for natural gas powered cars. The New York Times reports:

By an odd confluence of public policy and private initiative, Utah has become the first state in the country to experience broad consumer interest in the idea of running cars on clean natural gas. Utahans are hunting the Internet and traveling the country to pick up used natural gas cars at auctions. They are spending thousands of dollars to transform their trucks and sports utility vehicles to run on compressed gas. Some fueling stations that sell it to the public are so busy, they frequently run low on pressure, forcing drivers to return before dawn when demand is down.

It all began when unleaded gasoline rose above $3.25 a gallon last year, and has spiraled into a frenzy in the last few months.

We’re used to using natural gas in our homes. But in our cars? When you think about it, why not?

Natural gas is the cleanest burning of all fossil fuels. It comes from a wide variety of sources, many of them friendlier than the petrocratic regimes sitting on the lion’s share of the world’s oil supply. It already has a basic transport and distribution network, including thousands of miles of pipeline owned by MLPs. And as America looks to adjust its energy mix, the role of natural gas will only increase.

A Push From Washington

On the political side of things, we have also seen a major change in Washington that could boost natural gas demand.

For the past eight years, the White House has been firmly on the side of the oil majors. That led to a general hesitancy to mess with the energy mix too much or to put too much pressure on the big oil firms.

But the incoming administration — the new broom ready to sweep clean — has a very different view. The big oil companies are already bracing for an expected “windfall profits tax,” and there is talk that President Obama will order a drilling halt in environmentally sensitive areas.

Nor will it be enough to slam big oil. The Democrats will also have to take swift action on alternative energy measures. This means playing up as many viable oil alternatives as possible… including clean-burning natural gas.

Areas like wind, solar and geothermal will get a lot of positive attention from the new administration. They may well be the focal point for the millions of “new green jobs” Obama has promised. But natural gas will still be a big go-to element because: 1) We’ll need all the stopgap solutions we can find, and 2) So much of the infrastructure is already there.

The funny thing is, as natural gas catches on (in terms of political and consumer trends), the price will be set to rise right along with the supply. Big demand requires big supply to match.

Good To Go With MLPs

So, how to play it? There are more than a few ways to tap the upside, once natural gas prices start to rise. But one simple way is to have exposure to MLPs. As oil and natural gas prices rise, so will the MLP’s transport volume and profit margins. That’s good for share prices and dividend yields alike.

And if you’re looking for other simple ways to profit from today’s market follow the detailed instructions outlined in this letter, you’ll learn how to add $4,570 to $11,450 to your bank account every month, courtesy of the U.S. Government.

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