Natural gas future prices have been in decline since June 2008 and have stayed low. Even crude oil prices have bounced back from recent lows of $75 a barrel.
Most investors avoid investing in natural gas-related stocks fearing that natural gas prices will stay low or even go lower in the near future due to oversupply problems.
However, I do believe that it may be a good time to make a bet on some stocks in this sector.
1. Natural Gas Consumption:
Based on the report released from U.S. Energy Information Administration, winter months (November - March) always have the highest for total natural gas consumption. See the chart below:
(Click to enlarge)
2. Natural gas prices entering winter months:
Natural gas prices tend to go higher during the winter months. The following table gives the low and high of the natural gas prices from the August to December period, each year from 1994:
From the table above, we can see that there was only one year (2008) in which natural gas prices declined during the winter months. That's during a 16-year time span.
In the other 15 years in which natural gas prices increased during winter months, about half of those years (8), were years in which natural gas prices topped at the end of October to the start of November. In other years (7), natural gas prices topped at the middle to late December.
So far this year, the low on the natural gas prices was on August 27 and we have not seen any significant price increase. It closed at $3.80 Friday.
3. The long term trend of Natural Gas Prices is still up:
(Click to enlarge)
From 1994 - 2003, natural gas prices stayed in the $1.80 - $4.00 range most of the time. Since 2003, natural gas prices have been traded in the $4.00 - $8.00 range most of the time. Current price of $3.80 are at its low of the range.
4. Spikes and Valley:
Since 2000, there have been four price spikes and each spike is followed by a big valley. The duration between two spikes are 26 - 34 months. Now it has been 28 months since the June 2008 natural gas price spike.
There are a few Natural Gas related stocks and ETFs that we may be able to play with. Of course, it is hard to predict where natural gas prices will go this winter or even next year. But the market is certainly already betting on the increase of natural gas prices as the prices of all of the related stocks have been pushed up recently from their September lows.
SandRidge (NYSE:SD) gained almost 50% from $3.87 to $5.89. GMX Resources (GMXR) gained over 20% from $3.98 to $4.83. Chesapeake Energy (NYSE:CHK) from $19.62 to $22.80, Petrohawk (NYSE:HK) from $14.32 to $16.47, FCG from $14.50 to $16.50, XOP $37.5 to $42.5 etc.
Can the stocks go up further from here near term? We don't know. But as these stocks are being traded at their historical lows, we are betting on their long term potential.
Disclosure: Long SD, GMXR