Market Overview

Is Natural Gas Ever Going to Turn Around?

Natural Gas has been a very volatile commodity over the last number of years. The commodity that helps heat our homes has seen lows of under $2.00 and highs of over $15.00. However, within the last few years, natural gas has not traded above $10.00. The commodity has been in a downtrend ever since 2008.

We have seen economic figureheads, mainly T. Boone Pickens, proclaim that natural gas is better for the U.S. economy and the environment. Most Americans obviously have seen the negative effects to the environment of the combustion engine, but is a natural gas-powered engine that much cleaner?

When comparing to diesel and gasoline powered vehicles, “natural gas vehicles can produce significantly lower amounts of harmful emissions such as nitrogen oxides, particulate matter, and toxic and carcinogenic pollutants as well as the greenhouse gas carbon dioxide,” according to the Department of Energy.

According to the U.S. Energy Information Administration's Annual 2010 Energy Review, natural gas accounts for 25% of the primary energy consumed, with petroleum topping the list at 37%.

However, just 3% of the total consumption of natural gas is attributed to transportation. So there is obviously some room to grow in that aspect, however, politics play a major role in the logistics involved with converting our energy consumption to more clean-burning alternatives, and currently, they do not seem to like the idea of clean-burning natural gas engines.

Consumption in natural gas is expected to increase by 50% over the next 20 years; however, the United States has the Marcellus Shale. It has been said, the Marcellus Shale is to natural gas as what Saudi Arabia is to oil. So with this expected demand, there is supply to back it.

Whatever you may think for the long-term expectations for natural gas, North America is entering the beginning of its winter season, and with it is cold weather and the need to heat your home. There are obviously many more factors that affect the price of natural gas, but a colder than expected winter season could drive short-term prices higher. With the commodity trading at two-year lows, natural gas may be ripe for a quick trade.

Below are some long-term trading ideas:

ACTION ITEMS

Bullish

If you believe in an increase in global population (need to heat more homes, transportation, etc) and more legislation to allow alternative energies to power vehicles, etc., consider the following:

  • As population continues to grow around the world, the need for different modes of transportation are needed in many developing countries. For example, countries like India already use natural gas to power its vehicles. Cummins (NYSE: CMI) manufactures, distributes and services diesel and natural gas-powered engines. If this trend continues in developing countries, let alone if the United States builds out a natural gas-powered personal vehicle fleet, Cummins will likely benefit.
  • Cheniere Energy (NYSE: LNG)(NYSE: CQP) announced a 20-year deal with GAIL India to deliver 2.5 million tons of liquefied natural gas on an annual basis. This is a massive deal, and shares of Cheniere Energy moved over 10% higher after this deal was announced. This also strengthens the argument of an industry demand trend in developing nations. Going forward, Cheniere Energy may receive more contracts for liquefied natural gas from other nations, as the company already has experience in developing multi-year deals.

Bearish

If you believe in the laws of supply and demand that given any increase in global demand, supply will also be ramped up, consider the following:

  • To combat increasing global demand, companies will increase production. One company that would benefit is Chesapeake Energy (NYSE: CHK). Chesapeake Energy engages in the acquisition, development, exploration, and production of natural gas and oil properties in the United States. So as demand increases, so will Chesapeake's production.
  • Sell natural gas futures into strength whenever there is an increase in demand and a price increase, as production will increase to combat it. You can do this by shorting the actual futures contract, buying puts options, or by shorting the United States Natural Gas ETF (NYSE: UNG).

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