Natural Gas Is Headed Lower

• Report this Comment On August 21, 2009, at 8:06 PM, AlexisMachine wrote:

  Recently I came across an intresting theory that I'm not sure quite what to make of but I do think it's intriguing. In a nut shell it boils down to this: Natural gas is underappreciated by the political class and undervalued by the market. A barrel of crude trading at $73 contains approximately 5.8 million British thermal units (BTUs) worth of energy. Natural gas is priced per one million BTUs. One barrel of oil contains 5.8 times more BTUs than one unit of natural gas. Therefore oil should be expected to sell at roughly 5.8 times the price of natural gas on the futures market.

  Yet west Texas intermediate crude currently sells for more than 26 times the price of gas. The ratio is clearly out of whack. What the ratio isn't clear on is whether oil is being grossly overbid or natural gas is being grossly underbid. If the oil market is correct, inflation is on the way, and natural gas will soon join the party. If the gas market is correct, a bout of asset deflation may be around the corner that brings oil down with it.

  One way or another- whether by natural gas rising, oil falling, or a combination of both - the ratio will eventually head back towards its fundamental energy equilibrium of 5.8:1, as consumers of energy wise up and make the necessary adjustments in thier businesses/personal lives to switch from relatively overpriced oil to relatively cheap natural gas.

  Lastly, the price of natural gas must rise 50 to 100% from where it is today just to keep existing production economically sustainable. Also this is a fuel supply we have an abundance of within our borders which is absolutly not the case with oil.

  Personally I am inclined to view the recent run up in oil prices with a more jaundiced eye that the recent record lows in the price of natural gas not seen since 2002. The fundamentals just are not there to justify $73 a barrel oil given the state of the economy much like the $140 per barrel prices we saw in 2008 where quite simply unsustainable at that level and it was just a matter of time before we saw those prices decline. The rapidity and depth of the decline was a bit of a shock but our economy simply could not sustain 140$ a barrlel oil last summer and in it's current state will have difficulty sustaining $75 a barrel oil and most certainly cannot sustain the $80-100 dollar a barrel oil that some predict we'll see by years end. The already cash strapped American consumer whose spending drives 60% of our GDP traditionally cannot afford to spend at the previous levels necessary to boost the economy as they have in the past and $80-100 dollar a barrel oil gobbleing up the additional 100s of billions of dollars of an already meager discretionary budget would only send the economy into another tailspin. This in turn will depress oil prices right back down to record lows as an increasingly unemployed and broke population drives demand down the crapper. I think that this talk of economic recovery being right around the corner is baloney but I know that even it is 85$-100$ a barrel oil would suck all the air out of the room killing of any hope of economic recovery that existed. Long term I'm bullish on both oil and natural gas prices but it seems to me that right now the better value buy is natural gas at record lows than oil at 74$ a barrel is.

• Report this Comment On August 22, 2009, at 2:43 AM, footchester wrote:

  <I>Long term I'm bullish on both oil and natural gas prices but it seems to me that right now the better value buy is natural gas at record lows than oil at 74$ a barrel is.</I>

  But short of entering into the natural gas storage biz, how do investors take advantage of the low gas price? Any company that is involved in natural gas is probably even more involved in the oil biz. I can't purchase a few million cubic feet of naturarl gas and store it in my basement, so how do I take advantage of a commodity price that is sure to rise?

• Report this Comment On August 22, 2009, at 3:03 AM, automaticaev wrote:

  ya ill buy some if it goes lower. be a nice add to my port

• Report this Comment On August 22, 2009, at 7:27 PM, Xabbo wrote:

  Footchester,

  You could buy an ETF such as UNG.

• Report this Comment On August 22, 2009, at 8:03 PM, olsonda1 wrote:

  Two things, producers are full out because their hedges in place extend through this year and maybe next. Chesapeake has its gas sold for 2009 around $7 and for 2010 around $8. Read their press releases recently. Why cut back???

  Secondly, Users of Nat gas who can switch fuels are using the hell out of coal in anticipation of Cap and Tax. This will be the base period for carbon emissions and coal emits between two and three times as much carbon dioxide. After Cap and Tax, they only need to switch to nat gas to achieve all their emissions quotas for next ten years! I'd be foregoing nat gas in favor of coal right now too.

• Report this Comment On August 22, 2009, at 8:13 PM, NOTvuffett wrote:

  I don't know if nat gas is going to go back to historical price relationship with oil. It is a more regional commodity and there have been significant finds and development of nat gas production in the last couple of years.

  Xabbo's suggestion to buy UNG while nat gas price is so low seems reasonable to me.

  I am long on oil and nat gas with real money, no matter how much people may want to change our dependence upon them, that time is not close.

• Report this Comment On August 23, 2009, at 12:44 AM, Kisei wrote:

  UNG is currently trading at a premium to NAV because it is not accepting new money (ie it is now trading like a closed end fund). This is due to worries that regulators may impose a limit on the amount of futures ETFs can buy, thus impinging on their ability to grow beyond a certain size.

  Another way to play nat gas is through a pure play E&P such as Contango (MCF). MCF is trading at a level close to the value of their proven reserves.

• Report this Comment On August 24, 2009, at 9:33 AM, rankincap wrote:

  The independents of the shale play are drilling full out because they have leases they have to drill. In their rush to secure all the Shale leases they created a gold rush mentality and paid upwards of $30,000 an acre with 27% royalties and then giving landmen overriding interest. If they do not drill the leases they have lost all their lease money, so they will drill reguardless of the price of gas.

  I will buy the gas companies again when they retreat a bit.

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