Cheap commodities are always out of favor. With natural gas currently trading at $4.30/mcf, the stuff doesn't exactly look like the next gold mine. But how long will natural gas remain cheap -- especially when demand for this particular commodity is predicted to grow exponentially?
My Foolish colleague Dan Dzombak clearly explains why it's important to invest in a commodity when it's fallen out of favor with the market as a whole. That kind of contrarian spirit isn't easy to cultivate. But as Dan explains, that's how fortunes are made.
Why natural gas?
Demand for natural gas in the U.S. will see a sharp increase in the next two decades. According to the Energy International Outlook, consumption in the U.S. is poised to increase by 14% from 2009 to 2035, while domestic supply is projected to increase by 29% in the same period. In short, net imports will be drastically reduced looking into the future as natural gas reserves in the U.S. become more accessible, thanks to more efficient advanced technology.
Industrial and electricity demand
Speaking of demand, the EIA estimates that industrial energy demand will grow into the future at an average rate of 1.2% annually. In fact, demand for natural gas stands at 37.6% of total industrial energy demand.
The industrial sector is undergoing consolidation through mergers and acquisitions, a trend that is expected to continue into the future. In such a scenario, cost-cutting measures and increased efficiency become really important. Efficient natural-gas-powered applications will likely replace those legacy systems that consume a lot of energy.
Additionally, restrictions on industrial emissions are expected to turn stricter, which can only increase industrial demand for clean fuels like natural gas.
Increased electricity generation should heighten demand by an average 1.8% per year through 2025, according to the EIA. Out of 335 gigawatts of new electric generation capacity expected in this period, 57% will be natural gas combined-cycle or combustion turbine generation.
Add to that the replacement of less efficient and environmentally polluting electric generation plants with natural-gas-fired units, and the demand for gas is bound to soar. I believe natural gas companies are well-positioned to profit from this opportunity, especially those currently managing to eke out profits despite an ugly market for the commodity.
Names to remember
Transportation and pipeline companies will definitely cash in on this development. Boardwalk Pipeline
A question of economics
With many companies' cost of production higher than the price at which natural gas trades, it is obvious that producers would want to move to other resources giving better returns such as oil. Hence, with more such companies moving to greener pastures (read oil), it is imperative that demand for natural gas will outstrip supply to the extent that prices will shoot up -- and there is ample room for that. But this is where things look promising.
Here, Ultra Petroleum
Gas utility Atmos Energy
Foolish bottom line
In the long run, Foolish investors have a lot to gain from natural gas. The signs are definitely looking good, and there is no reason why natural gas shouldn't enjoy the status oil has now. Looking for more ideas? Check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." Just click here to grab a copy.
Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and TransCanada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.