“Get ready for a run to $5.”
That’s what I told a colleague a few days ago.
We were, of course, talking about natural gas prices.
We’ve known since last year it was only a matter of time before prices rallied after a brief respite below $2 MMBtu. But I’m hoping nat gas won’t head north of $5, because demand might sink if prices jump too high too quickly — and we’ve seen prices increase 25% between February and March (click chart to enlarge):
Historically, this time of year is when we start preparing for prices to decline. Spring weather prompts people to turn off their heaters, the driving force behind peak natural gas demand during colder months.
In fact, natural gas accounts for about three-quarters of the total energy used within our residential and commercial sectors in 2011. And an increasing number of new homes being constructed today are taking advantage of natural gas for heat.
However, this isn’t what makes me optimistic about natural gas in the long term. And my bullish sentiment is growing sharper by the day…
Now, I won’t blame anyone for disagreeing with me. After all, the low-price environment our supply glut has created since 2008 is enough to make even the most seasoned investors hesitate.
It’s certainly driven practically every natural gas producer to rethink their strategy — directly resulting in a standstill of drilling activity:
The slowdown is enough to give investors pause — and yet it’s only boosted the fervor of my bullish outlook…
You see, in spite of all the data and statistics designed to drive us away from natural gas, we’re still seeing strong news coming out of the very areas we’ve been talking about for years.
(Re)Meet the Marcellus
Sooner or later, people will come to accept the fact that some shale plays won’t go away.
Last month, I mentioned how Encana Corp. was breathing new life into the Haynesville, a play that investors have all but abandoned in the wake of cheap natural gas. A few years ago, the Haynesville Shale became the top gas play in the United States after production there surpassed the Barnett shale in Texas.
That torch has been passed again, this time to the Marcellus Shale…
This was long overdue. Recently, IHS reported pipeline expansions in the Marcellus play helped increase production to over seven billion cubic feet per day, officially making it the top natural gas play in the United States.
Even more impressive is that this increase happened in spite of the drilling decline:
Pennsylvania and its portion of the Marcellus has outperformed every other region:
Compared to those other states, this is one of few places left in North America where natural gas production is actually growing.
It’s booming for the same reason Encana is finding so much success in the Haynesville.
Look, the story behind the continued success in shale and tight oil and gas plays isn’t about the drilling and completion techniques being used…
It all comes down to improving upon that technology.
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How to Invest in Gas
I get worried whenever I hear about someone gambling on a sudden spike in natural gas prices. I know it’s because they believe natural gas at the Henry Hub will one day mirror Asia’s double-digit prices… but the stark reality is it won’t.
More devastating than believing this is putting your hard-earned money on it.
One of the ugliest stock charts I’ve ever come across resulted from betting big on natural gas price spikes. Normally, I’d tell you to look away. But I think it’s imperative for you see this stuff up close and personal:
Meanwhile, look how Cabot Oil and Gas — a major Marcellus player — performed over the same time frame:
My advice?
Don’t work yourself into a panic over mild price swings over the next two years as the supply glut works itself out. The best natural gas investments for individual investors are the ones preparing for the long term.
I believe it’s only a matter of time before we see $5 per MMBtu. Anything higher, and we’re jeopardizing the cost advantage gas currently has compared to coal. But at the end of the day, the most lucrative profits over the long haul will come from companies that will grow regardless of which direction the price of natural gas moves…
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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