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Natural Gas Is A Buy

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A recurring theme for me this year as I have talked and written about the energy markets has been that natural gas prices have been unsustainably low. At Investing Daily’s annual summit in Las Vegas in early May I advised investors who were kicking themselves over missing out on the rally in oil (at that point up nearly 80% from the February lows) not to miss the opportunity in natural gas.

As I stressed during that presentation (the 3rd time I had presented this slide in 2016), “If you don’t take anything else away from this presentation, pay attention to this slide:”


As I pointed out then, each time the price of natural gas has dropped below $2.50 per million British thermal units (MMBtu) over the last two decades, it proceeded to more than double within two years. The only exception to this rule was 1997, when it took until 2000 for prices to double. The same market dynamics that caused prices to double in the past are evident today, and the price when I delivered that presentation was hovering around the $2 mark.

Since then, the spot price of natural gas has risen to $2.59/MMBtu, an increase of 46% after the low of $1.77 just two weeks ago. Natural gas companies and indices linked to natural gas prices have surged as well. But is it too late for investors to jump in?

The reason natural gas prices have been depressed is well-known. Following an extremely cold winter in 2013-14 that depleted natural gas inventories, the U.S. has experienced two years of relatively mild weather. This moderated natural gas demand, which wasn’t sufficient to keep up with strong supply growth enabled by the continuing shale gas boom. As a result, natural gas inventories that were so low coming out of the 2013-14 winter were quickly replenished, reaching an all-time high following this past winter:


The net result was that after spiking above $6/MMBtu in 2014, natural gas prices have been declining for nearly two years. But as shown in the graphic above, natural gas prices don’t typically remain below $2.50/MMBtu for very long. Further, there are many long-term demand drivers on the horizon. There are many new chemical manufacturing projects underway that will have a large impact on demand, new liquefied natural gas (LNG) export terminals coming online, and utilities are switching from coal to natural gas.

The only thing that has been keeping natural gas prices in check is continued strong growth of natural gas production. The recent spike in natural gas prices is a result of unseasonably hot weather, which puts additional demand on utilities that rely on natural gas for power production. However, natural gas inventories are still quite high by historical standards.

In the short term, natural gas prices are strongly correlated to the weather. Longer term, good things come to those who wait. Sub-$2.50 natural gas isn’t sustainable, but if the weather moderates the price could easily pull back given current inventory levels. If it does pull back, investors who can look beyond the short-term fluctuations should be rewarded by investing in natural gas producers in the U.S. and Canada. History is certainly on your side.

Tags: oil, natural gas, energy, gas

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