By FS Staff
Natural gas prices (NYSEARCA:UNG) turned higher today after the Energy Information Administration reported an increase in supplies far lower than expectations. With historically low inventory levels, tighter EPA regulations, and current Ukrainian tensions, energy expert Robert Rapier told Financial Sense in a recent interview that there's a good chance we'll see spikes in the price of natural gas this year.
During the winter, record levels of cold and snow in the U.S. created a record drawdown of natural gas inventories, which are now at 11-year lows. Normally, that would be enough to support higher prices in the near term, but Rapier sees tighter EPA regulations creating a long-term bullish environment for natural gas as well.
The largest amount of electricity production in the U.S. has traditionally come from coal, which is also to blame for 80% of carbon emissions and potential warming effects, according to Rapier.
In 2015 and 2016, new regulations will go into effect where coal-powered plants must meet the highest emissions standards in the industry. With this trend only increasing over time, Rapier said to expect coal plants shutting down at an accelerating rate, also noted by the EIA in their recent Annual Energy Outlook. Not surprisingly, with natural gas taking the lead to replace coal, many of the shutdowns are taking place around areas with abundant natural gas supplies, like the Marcellus Shale.
Rapier also sees the increasing trend towards renewables, like wind and solar, as bullish for natural gas as well:
Renewables are going to continue to ramp up, but coal is firm power. Firm power is on-demand power and natural gas is even better than coal in that respect because it can respond very quickly to fluctuations. So if you put in a lot of solar [or wind] power, technically that has to be backed up 100% because [they]…may produce zero output at some point…and natural gas is ideal for that.
Given all the bullish factors Rapier listed, Financial Sense host Jim Puplava asked whether natural gas producers, which benefit as the price rises, are currently undervalued. Rapier answered:
Very rarely do I see such a large disconnect in the price of a commodity and the price of the companies producing that commodity; and I see that right now in natural gas. I made a conviction buy a couple of months ago. I said there's no way that Devon Energy (NYSE:DVN) can stay where it is. It was trading at $59 and so I bought it. And I don't buy a lot of stocks. I tend to buy and hold, but they were hitting 52-week highs last week so some of them are starting to move up. Some people are starting to recognize that these guys are undervalued. But I see very good years for the natural gas producers.
However, Rapier cautioned investors not to focus on short-term profits and said:
I've seen companies languish for a very long time. Sometimes you have to be patient. Again, that goes back to Warren Buffett. He's patient; he buys; he sees value...take the long view.