As Natural Gas Prices Decline, Natural Gas Stocks Rise

Natural Gas Prices are setting new lows almost every week - and everyone expects them to continue lower for some time. But natural gas stocks are going up.

Investors clearly believe that the collapse in the number of rigs searching for oil and gas is going to mean a sharp reduction in gas supply sometime in the coming months, causing gas prices to rebound. Consensus from many analyst reports I have read suggest that won’t happen until Oct-Nov this year, but all are recommending to their investors to begin positioning themselves now.

And the charts on the natural gas stocks say investors are listening.

Stocks do lead fundamentals by 6-9 months. And the many reports that I read are telling investors that when natural gas prices turn up (due to either much lower gas injections into storage in the summer or much larger net withdrawals from storage starting in October) it will be a very fast move up.

It’s only April, but I can almost smell the pent up demand from the market waiting for that first really bullish gas inventory number. And that’s what makes me think this gas market could stay lower for longer than most people think - but the rise in natural gas stocks says otherwise.

How low are gas prices now? Most investors surfing the web only see the price for the NYMEX hub out of New York, and a few see the Henry Hub price out of Louisiana. But there are about 14 natural gas hubs in the US - and many of the Midwest hubs now have prices around US$2/mcf, and I saw one price at US$1.44. By contrast, NYMEX Thursday was US$3.69. And almost everyone agrees (I can’t find one dissenting opinion) that natural gas prices will go lower throughout the summer.

Both institutional and retail investors are looking past the huge natural gas storage levels in both the US and Canada, the looming threat of large LNG (liquid natural gas) shipments being dumped into the US this summer looking for either storage or sale at any price, low customer demand due to recession and the large amounts of shale gas being discovered in North America.

Natural gas bulls can refute any and all of these points, but the main point is…nobody really knows the future. But in bidding up natural gas stocks these early, investors are taking the falling rig counts as their most important factor.

First Energy Capital of Calgary estimates the US needs to have 1230 drill rigs working to sustain production. Last year there were 1400-1600 active gas rigs, this year there is just under 800. However, more of these rigs - 40% now - are horizontal rigs that greatly increase production compared to vertical wells. The number of horizontal rigs is not down as much, and drilling in the prolific Haynesville and Marcellus shales is continuing. Gas production in the US is down slightly over 2008 - but last year was a record high year.

In Canada, there were 83 total rigs working last week, down 29 from the same week last year. 67% of the rigs in Canada drill for gas, on average. I could not find any statistic to say how many rigs are needed to keep Canadian gas production constant.

How low will the rig count go? How low will the subsequent drop in supply be? When will that start to show up in reduced inventories or large withdrawals?

For investors buying natural gas stocks now, only time will tell if the early bird gets to eat the worm, or choke on it.

Comments

[ScottM:]

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Apr 19 11:07 AM

[Mad Hedge F...:]

This is where you start scaling in. OK, enough is enough! Right here, at $3.60, is where you buy Natural Gas ($NATGAS)! After peaking at $13.50/btu last year, it has become the red headed step child of the energy complex, plunging a gut churning 74% to a low of $3.50. To see demand this weak coming out of a cold winter is nothing less than stunning. The credit crisis has forced US companies like Chesapeake Energy (CHK) and Devon Energy (DVN) to scale back exploration, so the US rig count has dropped by half. The price collapse is welcome news for consumers, as NG is an essential raw material for making naphtha, fertilizer, and plastics and accounts for 20% of US electric power generation. It also is a favored fuel of the green crowd, as the only products of its combustion are carbon dioxide and water. The industry was making the leap from a domestic industry to a global one just as the global recession punched it right between the eyes. The completion of six liquefaction plans in Qatar, Russia, Indonesia, and Yemen, costing $48 billion, is expected to boost global production by 25% this year, and more big plants are coming on stream in the near future. Below $3.50/btu the pick producers start shutting in supply, which will cause the glut to disappear rapidly. If I’m right, and those really are crocuses out there and not some florid hallucination, then it’s time to load the boat with NG.

Apr 19 11:12 AM

[PeteK:]

Mad Hedge;
Agree with you 100%. Excellent info.

Mr. Keith Schaefer, early birds never CHOKE, they can swollow a snake if they find one. These birds are bigger than turkeys.
Have a good week.

Apr 19 12:42 PM

[Sober Realist:]

I don't see a big spike in nat gas prices anytime soon and neither do the experts. Just this past month, U.S. natural-gas supplies stood at 1,651 billion cubic feet, some 326 billion cubic feet higher than March of last year and 228 billion cubic feet above the five-year average. Ray Deacon, energy analyst a Pritchard Capital Partners says that his sense " is that there will be an awful lot of LNG this year," which will " keep natural-gas prices below $6 per thousand cubic feet for the foreseeable future."
We have a glut of LNG from around the world lapping at our shores. "The excess LNG that's being produced around the world has to go somewhere, and a lot of it will end up here because we have a lot of underground storage capacity," says Michael Rieke, an LNG analyst for Platts. Worldwide current LNG capacity stood at 175 million metric tons as of late last year, but an additional 52 million tons a year will come on line by the end of this year, according to a Platts white paper.
"Most people expected the global LNG market to be oversupplied this year, and that was before the economic slowdown hit global markets," Rieke commented. "The LNG market has been on a roller-coaster ride. It's turned into a buyer's market with oversupply, and it'll probably stay that way until the middle of the next decade."

So armed with this information, I would have to stay away from nat gas. How can you argue with facts?

Apr 19 01:02 PM

[Sober Realist:]

The spike in nat gas prices last year was due largely to a surge by the hot money into commodities. Oil has much more justification for increasing in price than nat gas. That bubble popped along with all asset bubbles this past year. Right now the hot money has moved into the banks and certain consumer discretionary companies. Besides that, I want low gas prices; it's how I heat my home.

Apr 19 07:20 PM

[nonidiomatic:]

I believe we will see with EPA and Congressional mandates for a greener GNP, the use of LNG (liquid natural gas) double or triple in the next 2-3 years. So while there may be a glut today of LNG's, regular market conditions will correct the over supply in short order (6-9 months at the outside). That is simply the way of ALL commodities. If it were otherwise, there would not be International Exchange markets for the future trading of any such commodities. I am wholeheartedly backing Mr. Shaefer's opinion in his SEEKING ALPHA article. I am also loading up on NG stocks that are trading 90-95% lower than their 5 year averages. One of the best looking stocks on the NASDAQ is CROSSTEX (XTXI). Check it out if you are interested in a 10-20X return on an investment today.

Apr 20 01:21 AM

[carbonates:]

I still think it will take a cold winter to bring gas prices back up, or an especially active hurricane season.

I see no real progress in Washington towards encouraging natural gas use. Most of the actions taken in Washington so far this year will hurt both domestic natural gas producers and domestic oil producers, and give Canada and other sources of imports an economic advantage.

The one thing that is still a wild card in all of this is that pesky decline curve on shale gas wells. While shale gas added tremendously to production last year, most of those wells have anywhere from 60-80% annual declines. It takes continuous drilling to keep most gas shale plays producing steadily. The gas shale effect could go away by the end of this year.

I'm holding the natural gas stocks I have (I have a large position in coal bed methane), but not buying more for now. I think we will see more declines before we see the next bull market for gas. In fact, I think we are going to see a serious shake-out with a few natural gas producers going broke this year as they watch their leases expire undrllled, or desperately try to drill to hold the leases at a loss.

Apr 20 11:15 AM

[Bee Lated:]

I have natural gas stocks PBT, PWE, PFG, and they have been cut by more than half of their original buying price and they only go up when natural gas prices go up. So I can't figure out what you are talking about.

Apr 20 12:02 PM

[Bee Lated:]

I have natural gas stocks PBT, PWE, PGH, and they don't rise when the natural gas price goes lower. These are down over 50% from my original buying price. I don't understand what you are talking about.

Apr 20 12:04 PM

[blonde molly:]

i do find it amazing that now that ng prices have collapsed, experts are predicting they're going lower.

very good comments above!

Jun 14 07:01 PM

[Freya:]

How many "experts" predicted the current price 9 months ago, 6 months ago or even 3 months ago?

If you know of one, let me know his/her name so I can see what the future will hold.

We have a Glut, currently.

Apr 19 02:24 PM