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Prepare for a Natural Gas Price Explosion

In my last article, I discussed how ISIS’ actions in Iraq aren’t likely to send oil prices blasting higher in the short term.

Supplies are simply too plentiful for prices to experience a major spike.

For natural gas, however, a price explosion is imminent…

Indeed, even though natural gas is such an abundant resource, there are other factors in play right now that point to a significant increase in prices over the next six to eight months.

In fact, seeing natural gas reach the $6 level by December isn’t out of the question.

A Roadmap to $6 Natural Gas

Remember, the trajectory for natural gas prices is decided mainly by five factors: usage predictions, demand forecasts, current inventory levels, a healthy dose of speculation and – of course – the weather.

Let’s take a closer look at the first four…

Price Driver #1: Usage. We’re certainly going to see greater commercial usage of natural gas – both for transportation (the fastest-growing segment) and for electricity generation. Because of tougher carbon emission regulations, many power plants are transitioning out of coal and into natural gas.

Price Driver #2: Demand. With a booming new housing market and greater occupancy in existing homes (that were once under foreclosure), we’re going to see more demand from consumers who are looking at natural gas to heat their homes – and power all types of household appliances.

Price Driver #3: Inventory. Inventory levels are at an 11-year low – thanks to increased consumption and a very cold winter season that drew down much more gas than expected.

Price Driver #4: Speculation. Investors are speculating about liquid natural gas production ramping up faster than expected, based on Russia’s moves this past spring and recent news that it has cut off supplies to Ukraine. In reality, LNG production and exports from the United States are still years away from making a real dent. But where speculation is concerned, the details rarely matter.

Now, the four factors above are all “known” at this point. And while they each point to higher prices ahead, there’s still one big “unknown” factor to consider: weather.

It will be the major determinant of natural gas prices for the remainder of this year.

A hot summer will push inventory levels lower, as more power plants begin relying on natural gas. At that point, if we have another harsh winter, supplies of natural gas won’t be replenished fast enough.

That alone should be enough to propel prices well into the $5 per thousand cubic feet (mcf) level – and maybe as high as $6 come December.

3 Ways to Play the Coming Price Surge

Now, you can play this upcoming spike in prices through traditional natural gas futures contracts.

Or you can buy premier companies in the sector that boast a strong correlation to the price of natural gas…

Chesapeake Energy (CHK), for instance, just set a 52-week high and has been a favorite of ours for quite some time. CHK has exposure to both oil and gas – and it’s the second-largest producer of natural gas in the United States. You can also get exposure through Devon Energy (DVN) – a major producer that’s also trading at new 52-week highs.

And finally, you can enter a more speculative position with a company like Westport Innovations (WPRT), which is trading close to its 52-week lows.

Westport is engaged in the design and production of environmentally sustainable engines, which – for the most part – means they run on natural gas. These engines compete directly with diesel engines.

They cost more to build, but based on current natural gas-to-diesel prices, the cost of operation is about 30% less than diesel-powered engines.

The country is on the cusp of having natural gas filling stations across major trucking routes, and Westport will deliver the higher-powered engines needed for long-haul routes.

Thanks to a delayed delivery of these engines, however, the stock has come under pressure.

That, combined with the coming price explosion for natural gas, could be creating the perfect buying opportunity.

And “the chase” continues,

Karim Rahemtulla