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Why We Keep Circling Back to Natural Gas

It doesn’t matter what’s going on in the global markets. Like a lion stalking its prey, our commodities coverage keeps circling back to the natural gas sector.

For several reasons…

Consumer demand is set to grow annually, as more homes adopt cheaper sources of energy.

The electricity generation sector is also poised to grow, as government mandates for cleaner air accelerate the shift away from coal-fired plants. (A natural gas-fired plant cuts carbon emissions in half, and it’s the cheapest alternative.)

Even the transportation sector is seeing double-digit increases in natural gas usage, as American companies like FedEx (FDX) and UPS (UPS) begin to embrace natural gas for use in their delivery fleets.

However, when we consider natural gas’ future growth potential compared to other energy sources, an important part of our long-term thesis hinges on demand and consumption by the industrial sector.

Let’s take a closer look. (Hint: You’ll want to take action ASAP.)

Natural Gas Making Major Strides

Just so we’re clear, industrial usage doesn’t refer to power plants, but to ethylene plants, ammonia plants, polyethylene plants, methanol plants, and metals and manufacturing.

Industrial customers use natural gas to fire up boilers for steam needs, direct heating for melting, baking, or drying commodities like metals, paper, steel glass, and food. Natural gas is also the fuel used for operating combined heating and power generation facilities to run factories, instead of being reliant on the electricity grid.

These are high-energy users and will further cement the demand side of the equation – something that’s still lacking, in my opinion.

Indeed, natural gas use in the industrial sector is becoming increasingly prevalent.

Between now and 2020, industrial adoption of the resource is projected to increase by at least 20%.

The Center for Energy Economics (CEE) – part of the Bureau of Economic Geology at the University of Texas at Austin – estimates that daily usage of natural gas will approach 26 billion cubic feet (bcf) per day by 2020, compared to a baseline of 19.8 billion in 2012.

Of course, the fact that natural gas is plentiful – maybe too plentiful as dictated by the lack of price momentum after the recent move higher – is something to consider as an investor.

When it comes to the industrial sector, that plentiful nature is critical – as it means long-term price stability and easy access at all times. So supply isn’t the issue here. Demand is what needs to be stimulated further.

Unlike crude oil, however, natural gas infrastructure has yet to catch up, as evidenced by the lack of infrastructure in places like North Dakota, which is still flaring a good chunk of gas.

Infrastructure is the final piece of the puzzle that’s needed to solidify the future of natural gas. And since consumption will increase significantly when accessibility is improved, infrastructure will ultimately push prices higher, too.

That spells insane opportunity, if you know where to look…

A Trio of Dominant Players

For the most part, investors are still caught up in the day-to-day movements of share prices based on inventory levels and weather patterns. That’s not where your sights should be set.

Instead, focus your attention on dominant producers that will be in the sweet spot moving forward – companies like Devon (DVN), Encana (ECA), and Chesapeake Energy (CHK).

Knowing full well that natural gas usage is on the upswing – and will continue to be for decades to come – it’s in your best interest to accumulate shares of these companies while the market is still ignorant to the longer-term trends.

My job is to point this out to you while shares are trading on the cheap.

Chesapeake, for example, is down almost 20% from its recent highs. Too many traders are focused on the cooler summer weather and decreased demand for natural gas. All the while, they’re ignoring the prolific and profitable natural gas liquids business the company operates… or its significant oil operations… or its substantial hedging program, which has locked in a lot of gas sales at prices in the $4s to $5s per thousand cubic feet (mcf) going forward.

It’s time to buy while the herd is selling, and focus on the long-term gains that natural gas will bring to your portfolio.

And “the chase” continues,

Karim Rahemtulla