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:
