A little more than six months ago, I wrote an article titled US Natural Gas: 3 to 6 Month Forecast. In it, I forecasted that the price of natural gas would essentially stay level for at least six months' time. I was correct, the same factors apply today, but the outcome six months from now could be different. As odd as this may initially sound, recent events in gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) could influence the outcome.
More and more, I'm seeing articles about precious metals and how they are no longer the safe haven investments they used to be. Precious metal investors are looking elsewhere and massive amounts of money are moving out of gold and silver ETFs. Oil (NYSEARCA:USO) and natural gas (NYSEARCA:UNG) are now viewed as logical alternatives to precious metal investments since the price of both, in the long run, should rise over time. Amongst the two, I believe UNG to be the better investment and I explain why below. For those who prefer oil, I link you to an article that attempts to explain why Oil is the New Gold. As for gold and silver, I'm not seeing the factors that could drive them up like UNG. In fact, a continued outflow of funds from gold and silver ETFs is likely.
USO seems to have climbed a bit too far too fast over the past month. If I had an investment in it, I would be closing it out now. UNG, on the other hand, looks well positioned. Fundamental factors are leading to UNG's eventual escalation. In my previous article, I discussed the many factors that will drive UNG's increase. Over the next 3 to 6 months, I believe those factors will finally begin to influence the price of natural gas. In light of this, I suggest that investors in the following companies take heed. Companies that will be most impacted are: Chesapeake Energy (NYSE:CHK), Cheniere Energy, Inc. (NYSEMKT:LNG), Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Devon Energy (NYSE:DVN), and Apache Corp. (NYSE:APA).
For those who prefer a bit of stability vs. the volatility seen in gold and silver, let me explain the coupling of natural gas with coal and how it limits massive swings in natural gas prices. The coupling helps to stabilize natural gas prices until UNG can eventually break free on the up side.
The cost of natural gas has fallen far enough to compete with coal in electricity production. As a result of this, the two have become related. If an event causes the price of natural gas to rise, then less natural gas will be used by power plants in the month that follows because power plants will switch over to coal for power generation. The decrease in natural gas consumption by power plants, in turn, will cause the price of natural gas to fall back to previous levels. Conversely, if events temporarily cause a fall in natural gas prices, then more of it will be consumed by power plants in the month that follows. This, in turn, will cause the price of natural gas to rise back to previous levels. Think of ballast in a ship. Whether a ship rolls left, or rolls right, the same ballast causes uprighting of the ship. Here, the uprighting is the returning of natural gas prices to about $3.75 MMBtu. However, over time, that price will eventually break free as export terminals open up, more natural gas gets sent through pipelines to Mexico, and more of it is consumed in vehicles. Clean Energy Fuels (NASDAQ:CLNE), for example, is enabling trucks to run on natural gas all across the country.
Those anticipating the eventual increase of natural gas prices should soon be placing very large bets. Until now, that increase has been too distant to justify a significant wager. However, institutional investors know that the rise in natural gas prices is forthcoming and they've been able to see the price of natural gas level off. Those who manage the largest funds know better than to try to catch a falling knife, and the price of natural gas was indeed a falling knife until early 2012, but it has leveled off for a reasonable amount of time now. Within 3 to 6 months, a moderate price escalation should begin since more factors will impact the price of UNG going forward. Most importantly, those factors should have a greater effect than the switching of fuel at power plants can accommodate.
Feel free to respond with comments if you have them but please provide references and links whenever possible. Good luck to all of you in your 2013 and 2014 investments.
Disclosure: I am long UNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.