NATURAL GAS “getting ahead with confidence” Part 1

Scarcity is always good news for a commodity-based investment. But when it comes to natural gas, scarcitydoesn’t seem to be an issue these days. Natural gas prices have been extraordinarily volatile over the past 15 years, and the recent experience is no exception as, prices have gained sharply since August 2009. However, they are still less than half what they were in 2008.

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With an unpredicted surge in production, the natural gas price is getting cheaper and cheaper compared to oil. There are concerns among traders also that the market will be oversupplied in the short- to medium-term, with rig counts going up and industrial demand still struggling due to the weak economy. These factors translate into limited upside for natural gas-weighted companies and related support plays. But, the gap between supply and demand is expected to reverse in the coming months as natural gas producers bet on the improving U.S economy, the forecast of an active hurricane season and many other factors.

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However, natural gas might have more upside potential than downward potential for the following reasons:

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1. Rising Inventory Discourages Production

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Lower demand and higher production resulted in storage injections. U.S. Energy Information Administration data on 10th June, 2010 showed that domestic gas inventories rose by 99 billion cubic feet to 2.456 trillion cubic feet, a record high for this time of year and a level not normally reached until early July. Strong gains in storage have helped ease concerns about rebuilding stocks for next winter even if the summer turns out hot or Gulf Coast storms temporarily disrupt supplies. However, sustained low prices could reduce drilling activity over time. While the gas drilling rig count has fallen in five of the last seven weeks and raised expectations that U.S. production will slow later this year and tighten an oversupplied market, some traders worry that prices between $4.50 and $5 were still high enough to encourage more drilling. Gas prices might rise along with demand once production starts to decline.

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2. Increasing Usage for N.G

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Natural gas is an almost perfect energy source. Lower-priced natural gas will once again compete with coal for the electricity supply. Growing concerns about the environment also make it more attractive than coal. In addition, natural gas fired plants are much cheaper to build than nuclear plants. Gas now competes with diesel fuel for trucks and vans. In Asian countries, gas is being used by a growing number of regular cars. These benefits of natural gas over coal can also underpinned the prices in coming period.

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