The Uptrend Has Officially Begun…
We’re putting you on notice…
The stage is being set right now for a multi-year – perhaps even a multi-decade – boom for natural gas.
As I write, natural gas is trading close to multi-year highs – in line with what I’ve predicted for quite some time.
It’s my belief that prices will stabilize at these levels before continuing to trend even higher.
Expect volatility, though, in the form of higher lows and higher highs.
The takeaway for us is that we’re still in the infancy of the boom.
As you can see in the chart below, natural gas prices are starting to climb back to the $5 level.
We’ve got a way to go yet, but we’re a heck of a lot closer than we were when prices were under $2 just a few short years ago!
If you look at where prices were as recently as 2008 – the dizzy heights of $13 per thousand cubic feet (mcf) – it shows you just how far the natural gas market has slumped since then. And the size of the recovery mission in store.
So will we see a return to those $13 levels?
Well, while the trend is pointing higher, there’s no way we’ll see $13 – at least not in this decade.
The reason boils down to basic economics…
Three Factors Leading the Natural Gas Recovery
Neither supply nor demand is where it needs to be. The United States is on the verge of becoming self-sufficient in natural gas, and may actually start exporting it in the coming years as excess supply becomes available.
This “glut” – basically, supply that exceeds demand – will be around for some time until “critical mass” is achieved on the demand side.
But we’re getting closer. For example…
~ Transportation: In my last article, I noted that the transportation sector was leading the way for growth in natural gas demand.
And this buildup in demand that I’ve written about for the past two years is one of the main reasons why natural gas prices have stabilized at current levels. As more users have switched to natural gas, a nice “demand floor” has been established. In fact, natural gas demand for transportation in the United States has already increased 10-fold this past decade.
~ Power: Growth is also coming from heating, cooling and power generators – all of which are switching from coal to gas.
~ The Housing Boom: As more U.S. homes are being snapped up out of foreclosure and new buyers enter the market, they’re creating excess demand for natural gas that simply didn’t exist during the height of the financial crisis. Once-dormant gas lines are now being put to use nationwide.
Add in the fact that natural gas usage is expected to double in places like China over the next decade, and you’ve got a recipe for higher global prices in the coming years.
For now, however, there’s ample natural gas supply, so while we wait for the longer-term trend to play out, understand that prices will only spike sharply higher if there’s a natural disaster or if fierce seasonal cycles call for more heating or cooling.
With natural gas, the bottom line isn’t supply… it’s demand. And as demand firms up in every sector that uses the fuel, we’re at the head of the table, watching the domino effect.
It bodes well for the main players entrenched in the industry. And a return to the $5 or even $6 level will lead to substantial profits for our favorite plays in the sector – Chesapeake Energy (CHK) and Basic Energy Services (BAS), as well as component manufacturers like Westport Innovations (WPRT).
And “the chase” continues….