Thursday, October 18, 2007

Natural Gas

I have been recently doing some research and speaking with a mining engineer friend of mine about natural gas and its prospects as an investment going forward. I’m in the process of developing a general strategy for investing in natural gas. As many of you probably know natural gas prices have been depressed while oil and other resources have been enjoying a boom. This point is be painfully clear if you are one of the many investors that have a gas stock or two tucked away in your portfolio…as many of them have literally been cut in half ie – CMT, GZ, GNY

Now it’s not all bad news. The good news is that because natural gas prices are so low many companies have either greatly reduced (or stopped) their drilling levels. Despite this fact there has been no movement in gas prices, why? Well the reason is simple we still have a ton of the stuff in reserve so there hasn’t been any pressures on the supply side…yet…but what happens when those reserves start to diminish? Well the answer’s obvious increased gas prices. This of course will cause increased stock prices of the gas producers. So in a sense the gas business is largely self-regulating over time.

Other factors that will affect the demand for natural gas are listed below:
1. Weather
2. Demographics
3. Economic Growth
4. Fuel Competition
5. Storage
6. Exports

I’ll elaborate on each of the criteria tomorrow and talk a little more about what I’m planning on doing with natural gas stocks.


Anonymous said...

Just a comment about natural gas. I am not an expert in the field, but I have been investing in oil and gas companies(E&P & integrated) for a long time.The ratio of the price of gas to oil has always been in the neighborhood of 6 to 1. Whenever this ratio got too far away from this number, either commodity would move up or down to correct.
A statistic that I read recently stated that LNG coming from countries in the middle east, africa, south america, accounted for 23% of the amount consumed in the USA. I cannot recall the specific numbers, but I believe that the article used a dollar amount of gas consumed instead of a volume. That dollar number was 5 billion versus 17.5 billion produced in North America. The article also stated that the increase in LNG imports coincided with a drop in natural gas production from Canada.The point of the article was to explain how the prices of the two commodities have moved so far away from each other, it also went on state that in the analyst's opinion, LNG imports would not be able to compensate for the drain on storage from a very cold winter or a very hot summer. They would however dampen price moves

Warren said...

I'm bullish on all energy, long term. I have some oil based stocks, but obviously "buying high" is never a good strategy. On that note, I think its a great time to get into NG, and I'd love to hear your opinions on various stocks. My knowledge on NH is limited.

MichaelD said...

What do you think about the piplines as a gas play? Volumes should go steadily and I read about pipeline capacity issues.


Natural gas will continue to decline.