Friday

Natural Gas - Be Greedy

2 Comments July 3, 2009 – 2:12 pm |   | Permalink |  Print This Post |

Natural Gas has taken a beating in the last few weeks, its been at least 3 consecutive down nights. For the week Gas is at least 10% lower (our ETCs). We were suspicious of its earlier rally when Bloomberg and every other blog had Natural Gas as the Most Read article and was reported to be on the verge of a breakout. When the whole world is barking up the same tree, we sense trouble. Nonetheless, our indicators suggest a major trend change in Natural Gas - so sit tight in your bunkers and wait till this storm passes.

Fundamentally, the news are now reporting a 33% higher Gas reserve, thanks to improved gas extraction technologies from shale gas. Shale Gas production makes up for 33% of total gas production, so it is by no means insignificant. The cost of extraction via Shale Gas is slightly higher at $6 per MBTU (while cost of production via conventional means is about $3.50-4.00). So, at these prices, non-shale gas producers will be breaking even whilst shale gas production will be uneconomical. Whenever the price of a commodity is below the costs of production, you can bet your savings that the supply vs demand mismatch will turn in our favour. It is not a question of if but when. Like it or not, the pipelines have been built and domestic use of Natural Gas (which is its major demand) will continue. Here are our reasons for being bullish on Natural Gas:

• Demand will continue: Natural gas is “greener” and with Obama talking up clean fuel and aiming to be independent of foreign oil, our speculation is for a major push for Natural Gas going forward. Current demand for NG comes from domestic use, so if industrial demand goes up with government support, the increase in demand will be phenomenal. It has been reported that the reserves in shale gas in the US alone is the equivalent of Saudi Arabia’s oil reserves. Unless the costs of extracting shale gas becomes cheaper, this would be uneconomical at current gas prices.
• Hyperinflation: with all the money printing, we think the price of gas will also go up.
• All time low ETC. NYMEX NG prices are currently at $3.68. Back in the 30s, gas was trading sub-$1 (this was when gas had no use and was flared as it was cheaper to flare them then to sell them at 60c per MBTU). It then went higher to the $2 mark throughout the 80s-early 90s. So $2 is not impossible, but that would mean the price of gas is actually lower after factoring in inflation.
• Production will be down: with price of gas trading at cost of production, less reinvestment in gas production will come online hence lower production the longer prices stay depressed.
• Market makers will manipulate prices higher. Watch out for a cold winter!