Is Natural Gas a Long-Term Investment?

According to the Energy Information Administration, energy from natural gas accounts for 24 percent of total energy consumed in the United States, second only to oil, which accounts for 40%. Coal accounts for 23%.

There are so many different applications for natural gas and new uses are being discovered all the time, such as in transportation sector. As you can see from the chart below (source), the industrial sector accounts for the greatest proportion of natural gas use in the United States, with the residential sector consuming the second greatest quantity of natural gas.

The government’s Annual Energy Outlook 2009 report shows that the monthly average Henry Hub natural gas spot price is expected to stay under $4 per thousand cubic feet (Mcf) until late in the year as abundant natural gas supplies converge with weak demand driven by an 8-percent decline in industrial sector consumption. The price is projected to increase from an average of $4.13 per Mcf in 2009 to an average $5.49 per Mcf in 2010 as expected economic growth boosts industrial consumption of natural gas.

Following chart shows last 2 years price for EnCana Corp (ECA), United States Oil (USO) and United States Natural Gas (UNG). Beginning this year, the price of oil and gas had different directions: oil (in green) was up and gas (in red) was down. More interestingly, even though EnCana's (in blue) 83% revenue is from natural gas, its price was also opposite of gas’.

Click to enlarge:

With today’s oil price stands on $70.5 and natural gas price of $4.15, the ratio is over 16:1. It is unlikely for price of oil and gas to be out of sync too long. For example, higher oil price could speed up oil sand projects, even though turning oil sands into something you can pour into your car’s gas tank is several times more energy intensive than processing conventional oil.

However, based on a DOE report released on March, 2009 will see the largest surplus of gas supply in recent years. The 2009 projected supply will be 23.72 trillion cubic feet and consumption will be 23.14 TCF. The projected price will be basically flat for the next 7 years. It would not be until year 2016 for price of gas to return to 2006/2007 levels, let along 2008’s.

As oil reserves decline and price skyrocketed, coal, one of the world’s most plentiful energy sources, has become a popular global commodity. U.S. has the largest coal reserves in the world. According to Christine MacDonald, author of Green Inc, the world’s coal consumption has seen double-digit growth in recent years, far outpacing any other source of energy. It predicts coal usage will double by 2030. Market Vectors Coal ETF (KOL) is the largest pure coal ETF.

Coal already provides nearly two-thirds of US electricity. Even though coal contributes 39% of world’s carbon dioxide emission, if gas price is too high, coal might easily takes over rest of electricity power currently generated by gas.

So for me, natural gas is a short-term bet and not a long-term investment.

Disclosure: I have long position on UNG

Comments

[Ashford:]

Coal is closer to 50% of US Energy production. Coal capacity is not increasing whereas natural gas capacity is. Coal cannot displace natural gas generation in the short or mid-term--you would need to build more plants. Given the uncertainties of carbon legislation, not many companies are going to go with coal.


Coal already provides nearly two-thirds of US electricity. Even though coal contributes 39% of world’s carbon dioxide emission, if gas price is too high, coal might easily takes over rest of electricity power currently generated by gas.

Jun 16 11:56 AM

[Thomas J. G...:]

what about supply? what about the wsj article 2 months about the huge natural gas find in lousiana/arkansas? a bunch of seeking alpha guys who seem to know about natural gas production said it was gas that was expensive to bring up. nat gas is less mobile than oil. if there's a huge new nat gas find in the u.s., that's a big deal.

Jun 16 11:58 AM

[chrisfive0:]

Relying on government statistics to form the basis of your investment thesis is never a good idea. Nat gas is the only logical alternative in this economic and political environment and it will become more widely adopted as a transportation fuel. We are in the early stages to be sure but these adoption cycles take time. As a long-term investment, you can bet Nat gas will be a winner. It's too easy and makes too much sense.

Jun 16 01:23 PM

[Larry House:]

I believe in coal, but I also believe in the long-term potential of natural gas.

Jun 16 02:34 PM

[Alamo:]

Based on equivalent heat energy, a million BTUs (MBTU) of natural gas currently costs about $4.12 while crude costs $12.59 for the same MBTU.

This 1:3 ratio cost discrepancy, would clearly seem to favor an escalation in natural gas prices even if crude costs come down a bit.

At 1:3, there's considerable leeway for heat purchasers to buy more gas and less crude. Throw in the environmental benefits inherent in natural gas combustion and something has to give. It should rather clearly result in an increasing demand for gas. With the glut in gas supply the adjustment expected won't be 1:1 ($12.00) but it is unrealistic to think prices will remain at $4.00.

The natural gas industry has to re-invent itself sufficiently to enable gas to be available wherever crude oil is. When that conundrum is solved ----and it's primarily in the transportation sector that crude is the king pin---natural gas will be the clear winner and $4.00 natural gas will be a distant memory.

Jun 16 04:37 PM

[one eye:]

You can't shove NG into a pothole.

Whether its for Bubble wrap or your plastic gallon of Milk or a billion Plastic cell phones, NG is useless other than for generating electricity to make these products.

Since NG puts out less CO2 than coal, I expect an acceleration in the increased construction of Nat. Gas Power plants. This will put pressure on prices.

But the real pressure (pun intended) on NG will start when Housing restarts. Almost 100% of new homes built this decade are NG. There is an oversupply of NG now because millions of homes are sitting vacant, connected but not using.

Give Housing a chance to show what it can do to this Glut.

Jun 17 02:02 AM

[A Barrel Full:]

Natural gas is the perfect complement to renewable energy.

Solar & Wind are intermitant, and need back up. Natural gas is the most flexible electricity generating fuel, with turbines being able to be switched on and off very quickly.

For this reason, I think that natural gas will develop hand in hand with renewables, and what is good for the latter, will also help the former.

What is missing for natural gas at present, is the last mile infrastructure in many major markets. Whether ever natural gas is made available, nobody will continue to use gasoil for heating.

Jun 17 02:32 AM

[Ferdinand E...:]

Interesting article, and it has been a while since I took a close look at natural gas, but the conclusion I reached when I was teaching oil and gas economics in Bangkok was that the global supply of gas was less than many persons believed. I think that eventually I will have to consider this again, because although I couldn't understand why Senator McCain choose Governor Palin as a running mate, I think that she was right about trying to steer a lot of 'arctin' gas toward the US - assuming that was possible.

Jun 17 08:56 AM

[Obi-Wan:]

With NG in high supply, foreign sources soaking up any attempts to cut production, and consumption at a recessionary low, my bet is that NG prices will be under tremendous pressure for some time.
If you're willing to wait a long time, fine, but there are other investments that will pad your wallet much faster (oil for one).

Jun 17 09:21 AM

[420Somewhere:]

Can anyone tell me the main differences between UNG and GAZ? I've read some stuff on UNG recently highlighting the risks of owning it these days (can't buy the futures contracts anymore b/c of the fund's bulging size so now it's buying swaps, the contango nature of gas right now, etc.), so I'm wondering if GAZ has a similar structure. Any help here would be appreciated.

Jun 17 12:17 PM

[one eye:]

Obi-wan: Do you need a pair of reading glasses?

So that you can follow the NG market, I mean.

NG turned its corner last month. It is now about 40% above is lows.

Jun 17 02:18 PM

[one eye:]

Somewhere, take a look at FCG.

Jun 17 02:19 PM

[somecatchyp...:]

Is natural gas a long term investment? Have a look at the link below,
appearing in today's Globe and Mail.

"Pick natural gas for a greener planet, and fatter wallet "

www.theglobeandmail.co.../

Jun 17 03:28 PM

[420Somewhere:]

Thanks oneeye, I saw that article merely seconds after posting my question. FCG may indeed work...still wondering about GAZ, though.

Jun 17 03:56 PM

[castironstr...:]

For the short term Natural gas should be transitional to wind, solar, and nuclear. However, if there is a good chance that North American supplies are large then being long natural gas is a good bet.

Jun 17 04:47 PM