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What's Up With Natural Gas?

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After crashing nearly 75% from last summer's record highs, oil has rebounded nicely. But natural gas remains in the cellar, as the clean fuel is down 30% since December. Why the disparity?

Fundamentally, the oil markets act much differently from natural gas. You can ship oil anywhere in the world where it is needed without too much trouble. With natural gas, though, you need an expensive pipeline or an even more expensive LNG facility to move it around -- without that, you can't do that much after natural gas storage reaches full capacity.

And storage is a big issue right now, with current conditions creating a perfect storm for natural gas. Cool spring weather has kept electricity demand down over the past couple of months, while a weak economy has hung over overall energy use. Power generation accounts for about 29% of US natural gas consumption -- but according to Bloomberg, electricity output is down 9.3% since the same time last year. This has caused natural gas in storage to climb to 2.56 trillion cubic feet in the week ended June 12, or roughly 23% above the five-year average.

In many ways, commodities act like stocks -- they tend to hit bottom on bad news. So, are there any potential upside catalysts on the horizon? A hot summer could make things reverse in a hurry, as could an economic rebound in the second half of the year. If those green shoots flower, it could spell a recovery for gas.

Stocks with potential
Whether gas recovers sooner or later, companies like ConocoPhillips (NYSE: COP  ) are likely to benefit strongly. ConocoPhillips' purchase of Burlington Resources in 2006 increased its exposure to natural gas. Moreover, despite some massive impairment charges recently, I like the company's long-term prospects. To be sure, ConocoPhillips doesn't give you pure exposure to natural gas. ExxonMobil (NYSE: XOM  ) , BP (NYSE: BP  ) , and Total SA (NYSE: TOT  ) all have fairly similar gas-to-oil reserve ratios. If you're looking to avoid the volatility of a purer natural gas play, the big energy companies could be a better fit for your portfolio.

Meanwhile, if you want to drill down specifically on natural gas, consider companies like Chesapeake Energy (NYSE: CHK  ) and land-driller Nabors Industries (NYSE: NBR  ) . There may be some political risk to both stocks, as a bill in Congress is threatening to put a previously exempt technique, hydrolic fracturing, under EPA supervision, which would effectively bring a halt to this type of drilling. Still, if decreased supply raised the price of natural gas, it could prove to be a net positive for the stocks in the long term.

All of these stocks have taken a beating since the energy sector peaked last summer, and all three stand to gain substantially if it recovers. There's no guarantee that natural gas won't see further losses in the short term. But given how far both natural gas and related stocks have dropped, in my view, the upside potential far outweighs any further downside risk.

More on market issues:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. Chesapeake Energy is a Motley Fool Inside Value recommendation. Total SA is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy. 

Read/Post Comments (3) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2009, at 4:14 PM, mrjimwilson wrote:

    Chesapeakes President was grossly over paid. Hopefully he will reward US by leading the stock to higher prices

  • Report this Comment On June 24, 2009, at 5:15 PM, mekat0101 wrote:

    Supplies of natural gas exceed demand. Reserves in the ground are at record highs. We need economic recovery and hot summers and cold winters. We need a growing market for product. Low prices and high reserves will encourage market growth, and soon please.

  • Report this Comment On June 24, 2009, at 5:51 PM, kindermorgan wrote:

    I doubt that EAP will ultimatly rule out hydrofracting. We need energy and Marcellus and Utica Shales lying over a mile deep are harvestable when properly cased. The real issue is the surplus of natural gas brought about by the strike in La, and the dakotas as well as the slowdown of industry in the USA. the industrial co-gen users like GM, Chrystler and Ford have reduced substantially the demand for Natural gas. Add to that the opening of the LNG port in St. Johns New Brunswick and the capacity of that port to supply 20% of the Natural gas demand from the northeast...a region where oil has been king for home heating due to the lack of infrastructural for delivering ng. Notice also the work ofn the Rockies Express ng pipline which was origanally intended by Kinder Morgan as a supplier of NG to the East coast.

    Until the neighborhood pipelines (distribution system is in plavce in urban east coast there will be a surplus of NG and low return. The Utica shales hit between Montreal and Quebec last year suggested the utica shales play would be 1-2 times the Marcellas play JUST in the area between montreal and quebec city. Do we really think that the United States of America will forgo that kind of energy supply? GET REAL

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