Is Now the Time to Buy Natural Gas?

Oil isn't exactly bubbling the way it did last summer, but it's once again flirting with $50, following its slide to less than $34 a barrel in mid-December. Nevertheless, Fools shouldn't expect natural gas to march in tandem with its crude sibling.

While oil consumption in the U.S. and throughout much of the world has fallen somewhat, the supply imbalance for black gold isn't nearly as severe in this country as for gas. The result has been rough: Chesapeake (NYSE: CHK  ) , the nation's largest natural gas producer -- whose share price has slid 75% from its 52-week high -- along with Devon (NYSE: DVN  ) , and XTO (NYSE: XTO  ) , both of which have declined about 45%.

The economy's simply been taking its toll on natural gas, to the point where demand has fallen way behind supply. On the demand side, the majority of gas usage goes to manufacturers, many of which have cut back operations in the face of our softening economy. As a result, even the cold temperatures that gripped much of the nation as winter approached had little effect on raising gas prices.

For the gas suppliers, the picture is pretty much the opposite. Earlier in the year, most of the major producers increased their production activity as prices rose and big new discoveries like Louisiana's Haynesville play came onstream. Even though drilling budgets are descending rapidly as the credit crunch tightens, it'll take a while before the cuts actually affect ground operations and begin to meaningfully reduce production. As a result, in the face of plummeting demand and slow production cuts that exacerbate oversupply problems, producers are in for more short-term pain.

And then there's OPEC -- or more specifically, the lack of any such organized body for natural gas producers. When the oil cartel's members agree to chop production -- and adhere to those agreements -- they can influence crude prices. While a cartel for gas has been discussed on and off, would-be member states doubt there would be much benefit, since gas is traded on long-term contracts, unlike the spot prices of crude oil. As a result, gas prices are less subject to international manipulation by the producers than oil levies. Without that sort of influence, gas prices may take longer to recover.

Down the road, possible environmental steps by the new administration could benefit gas usage -- to coal's detriment. Gas is used in about 20% of power generation these days, but a possible carbon-dioxide pricing plan and an improved electric grid, both of which have been discussed by President-elect Obama, could raise that share. Nevertheless, that change would be several years away.

So my advice to Fools is to go slowly with the gas producers. I'd suggest that you wait for supply and demand to move more into line, and for prices to start improving. With that ultimate scenario in mind, the companies named above, along with the likes of Southwestern Energy (NYSE: SWN  ) and Apache (NYSE: APA  ) , could become solid long-term bets.

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Chesapeake Energy is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days

Fool contributor David Lee Smith doesn't have financial interests in any of the companies mentioned. He does, however, welcome your questions, comments, or kibitzing. The Motley Fool has a well-oiled disclosure policy.


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  • Report this Comment On January 07, 2009, at 1:47 PM, dividendgrowth wrote:

    No, the US has way too much NG.

    The time to buy NG again is when you see lots of overleveraged, greedy small outfits going out of business, such as CHK and LNG.

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