Natural Gas: The Best Risk-Adjusted Commodity Speculation

By Eric Roseman

Will natural gas make a comeback?

The odds are pretty good that bargain hunters buying natural gas at today’s bombed-out levels could probably double their money in under a year.

All thanks to the fact that we could soon be facing rising industrial demand and the possibility of supply outages caused by the looming Hurricane season. Not to mention that demand typically rises during the summer as individuals turn up the air conditioning.

There’s no doubt about it; the best risk-adjusted speculation now for commodities investors is natural gas. There’s no other commodity that’s this cheap, this battered and this oversold (see chart below.)

From its high in July of last year, spot natural gas prices have now collapsed a cumulative 74%. In 2009 prices have declined 37%. Crude oil – on the other hand – has been driven higher by big supply cuts by OPEC and Russia earlier this year, seeing prices rise 19% to $53 a barrel.

Over the last several months, natural gas has been hammered as the global economy suffers its worst recession since 1981-82 coupled with soaring gas inventories. Though an extremely volatile commodity, natural gas at these levels has historically been a strong speculation following big bear market crashes.

Canada is home to some of the best natural gas companies, including Encana (NYSE: ECA). The stock is more than 50% below its all-time high and pays a 3.6% annual dividend at current prices.

It’s time to ride natural gas.

At just $3.55 BTUs (British Therman Units) it’s hard to believe prices can head much lower. All the bad news is already baked into gas prices.

Comments

[Shareholder...:]

And there is another Canadian nat. gas company rising: InterOil (NYSE: IOC).
seekingalpha.com/artic...
shareholdersunite.com/.../

They are featured on the cover of May's "World Oil" magazine because their Antelope1 well showed the largest flow rates ever measured.
messages.finance.yahoo...

May 07 10:53 AM

[jimmy46:]

Perhaps the best way to speculate on increasing NG is to buy
Mirant warrants, MIR-WTA.

Mirant provides electricity from coal plants,
this is the baseline electricity used.

The availability & price of electricity is set at the margin by the cost of NG.
When NG is high, coal plants like MIR, DYN, & RRI mint money,
when NG is low, they scrape by.

17 June 08 the warrants were selling at 19.73,
19 June 08 they were at 19.82
I know, because I sold then.

When the warrants plunged with NG, I bot again,
a lot under $1.
Much at 50¢
The warrants expire jan 2011, strike $21.50

I don't count on them going to $19 again,
but at $10, I'll be happy

Others are buying & holding these besides me,
volume has gone from 100,000-200,000 units/day
to 4-12,000 per day.

Buying and holding.

May 07 02:12 PM

[scrambledyegs:]

Yes NG has been hammered but has it bottomed? Why can't it slump under $3?

Lots of new supply is still coming online from the shale plays, LNG is going to start being imported, industry is still slumping, people are still losing jobs or having their earnings reduced and they are watching their thermostats closely (perhaps electricity demand will not be as strong this summer from residential utility customers). There is lots of extra NG available right now and I would expect this to put pressure on prices through the end of 2009.

May 07 05:10 PM

[tuj:]

You ever think there's a reason its "oversold"? Its called no demand + a huge YoY increase in production.

May 11 09:29 AM