Six Reasons Natural Gas Is Better than Oil

Six reasons why natural gas is a better investment than oil:

1. Reserves deplete faster than oil (in general)
2. Oil/natural gas ratio: the price of oil divided by the price of natural gas is at an all-time high (or close). This ratio stands at 17 (historically it has been at about an 8 or so), Natural gas prices will go up, oil will decline, or both. Also, natural gas is not a good hedge against the declining dollar (it is for the most part a domestic commodity) and storage capacity is more limited, thus not as admired by speculators as oil. This explains in part why it lagged the the spectacular performance of oil of late.
3. At $4, natural gas it is uneconomical to develop and look for new reserves.
4. No OPEC competition, LNG (liquid natural gas) imports are uneconomical at these prices.
5. Politically more favorable than coal.
6. After emission caps are implemented natural gas will become a cheaper alternative than politically and environmentally unfriendly coal.

Comments

[Cuthbert:]

Mr. Katsenelson:
Any recommendations on best way to invest in natural gas?

Jun 19 04:43 PM

[Shumann's H...:]

Try Chesapeake, listed as CHK


On Jun 19 04:43 PM Cuthbert wrote:

> Mr. Katsenelson:
> Any recommendations on best way to invest in natural gas?

Jun 19 05:00 PM

[tailspin:]

How can coal be environmentally unfriendly? It once was the environment.

Jun 19 05:58 PM

[Mad Hedge F...:]

Of course it's better, but it isn't internationally traded in a big way. The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia’s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30 (see www.madhedgefundtrader...). When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens’ plan to shift our transportation system to NG (see www.madhedgefundtrader...). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia’s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

Jun 19 07:36 PM

[DHH:]

i'm investing in EPEX for natural gas

Jun 20 02:19 AM

[john s. gordon:]

tailspin -

surface mining of coal in southern west virginia is environmentally unfriendly, or haven't you been reading the newspaper.
> jack

Jun 20 08:57 AM

[Ferdinand E...:]

Interesting note, and interesting comment by Mad Hedge. I wonder though if the latter is correct about certain things. One of those things is: turning to the gas futures market for information about the future gas supply. In fact the thing that soured me on Chairman Bernanke was his citing oil futures prices with a 3 year maturity when asked about the supply of oil. I've since become pro-Bernanke, and intend to remain so as long as he doesn't mention the oil futures market .

Jun 20 09:08 AM

[AndrewBaker:]

We've got plenty of natural gas in the US, it's a "green" fuel compared to many, it's currently a lot cheaper per unit of energy than oil, it's often a by-product of oil drilling so costs less to get it out of the ground. Winter is not so far off when we'll want to use more anyway, so for me, I'm long.

Jun 20 10:41 AM

[farwest:]

Unbelievable codswallop!

You've got it entirely backwards and show a shocking ignorance of the energy market and NG in particular.

Jun 20 10:49 AM

[Sovestor:]

One way analysis can go so far. A good analysis need to consider pros and cons, positive and negative aspects of natural gas.

Jun 20 11:19 AM

[jerrydd:]

He has to be kidding!! Oil is by far a better play especially after it goes down in late summer for probaly the last time. Ng is in good supply and much more can come online if demand is there so not so much of an upside compared to oil.

If one wants to play NG play the equipment/drillers which are way down now.

We hit peak oil last July and unless the US passes a big oil tax like $1.50/gal to pay it's real, full costs instead of it being in our income taxes, it's only going to go up.

Though don't go too long as in 6-10 yrs it will level out, then drop some as other energy forms will take it's place like RE/NG.

Coal's true cost too are huge and they should be taxed to pay them. So it's at best a short play as NG will eat into it big time.

At about $4/gal all kinds of RE is more cot effective and the price of RE equipment is dropping fast. It's just a matter of time until enough is out there to cut oil, coal use as RE will be by far more cost effective.

Remember the F-T process can convert almost any biomass into any HC. It's the same GTL process that is now used to convert NG into diesel by Shell, others. Several start ups are now building plants to use it to convert woody biomass to ethanol because of subsidy/tax reasons though gasoline/diesel would be better choices all things equal.

Also remember it's not that hard for most homes, small business to make their own power/energy including for EV's. This will stop oil prices from going too far up.

All the above is present or old tech and the only reason we are not already on it is the massive oil, coal, nuke subsidies.

Jun 20 12:36 PM

[AndrewBaker:]

Some considerations for and against natural gas:

Pros:

* Natural gas (largely methane) burns more cleanly than the other fossil fuels (45% less carbon dioxide emitted than coal and 30% less than oil)
* It is easily transported via pipelines and fairly easily using tankers (land and sea)
* It can be piped into homes to provide heating and cooking and to run a variety of appliances.
* Where homes are not piped, it can be supplied in small tanks.
* It can be used as a fuel for vehicles (cars, trucks and jet engines) where it is cleaner than gasoline or diesel.
* It is used to produce ammonia for fertilizers, and hydrogen, as well as in the production of some plastics and paints.

Cons:

* Even though it is cleaner than coal and oil, it still contributes a large amount of carbon dioxide to greenhouse gases.
* By itself natural gas is mostly methane, which is 21 times more dangerous for greenhouse warming than carbon dioxide so any leakage of the gas (from animals, landfills, melting tundra, etc) contributes strongly to greenhouse emissions.

Comment on "Peak Oil":

An evocative term but meaningless in terms of having any bearing on anything to do with oil at this time. No-one can say that we have reached peak oil because no-one knows how much oil there is. And no-one can say that some oil sources are uneconomic because no-one knows what that means in terms of future technology, costa and potential profits. BP has just stated that at current consumption levels on known reserves, the world has at least 42 years more supply. And that is without including new supplies. And by the time we may have an idea about how much is there, we may not even need it anymore, so worrying about lack of supply right now is not even in the equation.
.........................
In trading terms, I really don't care too much about which fuel, if either, oil or natural gas, is "better," and there probably is no right answer. In terms of supply, we have plenty natural gas, and in terms of energy unit cost, natural gas is cheaper than oil by factor of around 6. In terms of trading, I believe that on balance natural gas is too cheap compared to oil where they are viable alternative fuels. In addition, technically natural gas has recently gone up through its 50 ma, so now seems to be a good time to go long.

Natural gas is one of the most contrary commodities to trade, and can and does give you a good kicking when you think you've got it sorted, and I respect it for that. However, I'm going long for now and hope I get it right. At the end of the day, if anyone knows the energy markets that well, we would all know what will happen to oil and other energy commodity prices. The truth is, no-one does and so we don't, which is why we have the market in the first place.

Jun 20 01:28 PM

[Fred Linn:]

------"Even though it is cleaner than coal and oil, it still contributes a large amount of carbon dioxide to greenhouse gases."--------

Natural gas is mostly methane. Methane is 17X more efficient at trapping heat that CO2. This means that if we were to capture methane that would have ordinarily escaped into the atmosphere,[e.g. treating sewage, which we need to do anyway] and burn it---we are creating CO2, however, the CO2 traps heat 17X less than methane. It would be exchanging a high greenhouse effect gas(methane), for a low greenhouse effect gas(CO2). The methane in biomethane( for instance from sewage treatment) is exactly the same methane chemically as fossil fuel methane. It can be mixed in any proportion with no loss of performance, and no modification needed for any application. Any mixture of biomethane with fossil fuel methane above 6% would reduce the greenhouse effect compared not mixing, the greater % of biomethane in the mix, the greater the reduction of greenhouse effect.

Natural gas is far less damaging to the environment to acquire than either coal or petroleum. Both come from strip mines now. Strip mines destroy the land and pollute watersheds.

Jun 20 02:41 PM

[JCC:]

Technological breakthroughs in the extraction of natural gas have created a supply glut. You see when we fractured shale hoping to extract oil, we go plenty of natural gas. Natural flows naturally from fractured shale, whereas oil does not.

So we currently have an abundance of natural gas and the investment in extraction is dropping as well as the price. Worries about supply shortages because of the maturing of conventional supplies have been replaced by worries there aren't enough customers for the 1,200 trillion cubic feet of natural gas in shale deposits, enough to last a century.

So invest if you want, but the supply indicates that natural gas is a lousy investment for some time.

Jun 20 05:22 PM

[Fighting Yoda:]

There is glut of Nat gas worldwide. In US they can't cut the production enough to bring down inventories. With LNG and pipeline projects coming on stream - the inventories and prices will be under bigger pressure.
Unlike oil that is mainly used for driving - has no easy substitute, nat gas has many easy substitutes - coal, nuclear, etc. Will not be a buyer of nat gas - BRIC/China etc do not support the price of this.

Jun 20 05:56 PM

[scfranklin94:]

1) Reserves deplete faster than oil - generally true; depends on the formation, some gas wells drilled in West Texas are still producing 45 years later. Shale wells deplete much faster than conventional wells, but then you get 8x+ initially than what you get with a conventional well.
2) Oil/NG ratio - please get off of this; if you can put NG in your car instead of gasoline, then we would have interchangeability, but until then, forget the friggin' ratio.
3) $4 dollar gas is uneconomical to develop - check out the whole curve, 2010 is at $6+. If you drill now, the well won't be completed until the fall and probably won't flow until November. Gee, maybe that explains why strip after calendar strip has been sold the last two weeks and the rig count went slightly up.
4) LNG is uneconomical - Trinidad & Tobago's cost of nat gas is 1.50/mcf or less and then it costs a dollar to get it here, they'll do fine. Qatar just sold 250 bcf to Sempra for 2010 to bring in at Cameron. LNG producers don't like to sell at such low prices, but LNG liquification facilities are a sunk cost and the cost of operation is relatively low, so it will eventually come here.
5) Politically more favorable than coal - you would think so, but then how come in the Waxman cap & trade bill coal generators get their emission credits for free and gas generators and industrial users of gas have to buy their credits at auction? In effect we are subsidizing coal at the expense of NG. Could it be that the Dems need coal-state votes to get their brain-damaged bill passed?
6) Supposedly this will happen in 2025, when the coal generators have to buy their emission credits at auction, like everyone else. Be prepared for Senators and Congressmen getting on the tube, howling how we're raising the cost of electricity for poor consumers and how we're legislating US jobs out of existence.

Other than #1, I don't think you have much of an argument.

Jun 20 10:38 PM

[one eye:]

We have an abundance of NGas Reserves Not an abundant supply. The Current Shale gas extraction process is Environmentally Unfriendly.

Spin away folks, but our Increased NG reserves are due Entirely to Shale Gas estimates plus some. And until an extraction method which doesn't Pollute the Water Table arrives, I doubt there will be a large supply build from Shale.

NG is used for Nitrogen Fertilizers, Corn growth enhancement.

A lot of Spin has been seen on SeekingAlpha regarding CNG car usage, this tech sounds good until you finally figure out you won't be able to get a refill at some strangers house less than 100 miles from your home. If your Vacation plans include driving to some nearby Campground, be prepared not to use your car while there.

If Oil goes up, so will NG. Canada uses NG in its own Oil Sands extraction Process. Ramp up production which has stalled, ramp up NG usage.

Toss Iran into the equation, NG is going up.

Jun 21 12:29 AM

[Fred Linn:]

Coal can be replaced with natural gas easily. Simply remove the grates from the coal furnaces, and replace them with NG burners---sort of like giant burners from a kitchen stove. Everything else remains the same. Buildings, boilers, turbines, coolers, generators, controls and grid----no need to change any of that. Also no need for expensive scrubbers or flue ash catchers----sulphur is already removed from NG when it arrives(usually) and since NG is already a gas there is no ash, and not fireup time. And there is far less handling and maintaince on heavy equipment with NG---no trucks, trains, front loaders, bulldozers etc. needed, which also means less manpower needed. Far less need for EPA, State DNR, and local inspections, certifications, training, approvals, etc.

Natural gas is an easy sell to utilities and commissions/review boards/public/even environmentalists if you mix bio with it.

Jun 21 01:45 PM

[Fred Linn:]

Your job as an investor is to get environmentalists on your side.

You tell them---- help me get coal plants converted to NG. You will benefit because you will sell more NG. Environmentalists benefit because they can stop environmental damage caused by strip mines, water shed and aquifer pollution, air quality improves, and waste product and disposal problems are eliminated. Taxpayers benefit because of vastly reduced need for oversight and regulation enforcement frees funds for use on other critically needed projects. Utilities benefit from reduced handling costs and manpower needed. When environmentalists say that it still produces greenhouse effect gas(CO2), you tell them it is their job to get biomethane made, when they do, you'll be happy to mix it and burn it.

Seems like a win-win-win scenario all around. I could see natural gas investors getting a lot of support in expanding the use of their product in a short time.

Jun 22 01:17 AM

[Shale Gas:]

Natural gas production has not fallen yet despite the lower rig count because the number of horizontal wells has increased relative to total wells drilled. These horizontal wells are as much as four times as productive as vertical wells.

Jun 23 07:08 AM