The price of natural gas is perhaps the only form of energy that is actually falling in price. In fact, natural gas has been in a bear market since July 2008. Like many commodities, it fell sharply during the financial panic of ’08, but it has not recovered. Current prices for commercial natural gas are down 45% since the peak. Residential gas prices are down over 50% from the peak. That qualifies as a bear market in my book.
There are reasons for natural gas pricing versus that of oil, which is surging. First, natural gas is not as easily shipped as oil, so it is not viewed as a replacement for oil. Also, natural gas really is not a player in transportation, which is one of the biggest uses of products refined from oil. Finally, new drilling methods have led to vastly increased reserves in the U.S. and abroad.
This chart looks at commercial natural gas prices (per thousand cubic feet) dating back to 1976:
[Click all to enlarge]
Source: U.S. Energy Information Agency
As you can see, prices for natural gas were static until about 2000, when prices for many commodities began surging. From that point, prices went up considerably, including two spikes a few years back. Currently, natural gas being sold to commercial customers is over $8 per cubic thousand feet, which is the standard measurement. From this perspective, prices are higher than they were during the baseline period (1976-2000), yet they have also fallen considerably from recent highs.
That perspective is enhanced by the next chart, which analyzes natural gas prices (since 1985) for commercial customers in a different fashion by using inflation-adjusted dollars:
Source: Carpe Diem
Natural gas supply increasing
The U.S. is one of the world’s largest producers — and consumers — of natural gas. In fact, the U.S. overtook Russia to become the world’s largest producer of natural gas a couple of years ago. That could change, but clearly we have a lot of gas and we’re finding more.
Why is natural gas such a useful energy source? First, we have lots of it here and we’re finding more each year. Second, it burns cleanly and is one of the cleanest energy sources.
Could natural gas be the fuel of the future?
Right now, it is the energy source of choice for large power plants and industrial applications. Many power plants use coal, but natural gas is a cleaner energy source than coal so it should gain market share over time. Other applications such as home heating and cooking are well known. However, it is rarely used as an energy source for transportation except in a few specialized applications. Still, there is no reason it could not be used very effectively for powering cars and trucks.
In other words, natural gas consumptions should increase and, if it ever makes the leap into broad transportation use, consumption could soar.
This report from Morningstar gives a solid background on energy and natural gas. If you want to read the whole thing, you may need to do a free registration [emphasis added]:
The natural gas market has faced a prolonged downturn due to multifaceted economic drivers, but the long-term outlook for the energy source remains unchanged. There are several ETFs that may be used to establish or expand exposure to natural gas, but prospective investors should understand the context of the recent buzz, and that begins with an understanding of the energy space and the highly cyclical nature of natural gas .… [N]atural gas differentiates itself as a truly multidimensional fuel. It supplies the industrial, residential and commercial, and electric power sectors in comparable allotments of 32%, 35% and 30%, respectively.
The only U.S. sector in which natural gas lacks a foothold is transportation, as roughly 94% of transportation’s energy demand is satisfied by petroleum. Technical feasibility is not, however, natural gas’ constraint in this case. Despite lower power output than gasoline vehicles, compressed natural gas vehicles are widely used in a number of regions outside North America, most notably Southwest Asia and South America.
… Natural gas is capable of satisfying energy demand across all sectors of our economy in terms of its performance, and if a near-term bridge fuel is in fact required to stand as an alternative, natural gas is a prime candidate …
Most of the large integrated oil companies have natural gas assets, so that is one obvious way to invest. Here is a list of several funds or ETFs that invest in oil & gas production and exploration companies:
- Vanguard Energy (VGENX)
- First Trust ISE Revere Natural Gas (NYSEARCA:FCG)
- iShares Dow Jones U.S. Oil & Gas (NYSEARCA:IEO)
- SPDR S&P Oil & Gas (NYSEARCA:XOP)
- Vanguard Energy ETF (NYSEARCA:VDE)
The advantage of these funds is that they invest directly in companies that produce oil and natural gas and engage in related activities. Being funds that invest in stocks, they are easier to understand than energy funds that invest in futures contracts and other derivatives. Also, they are a broader energy play than just investing in natural gas alone. That means these funds are not pure plays in natural gas.
As you may have noticed, my list above did not include the U.S. Natural Gas Fund (NYSEARCA:UNG). I have written about this ETF before and I do not recommend it for a variety of reasons (see here). Here is a piece that has lots of in-depth coverage on problems with futures-based commodity funds (see here).
To me, natural gas seems like an almost perfect fuel even though it is not of the stature of oil. As already noted, natural gas is not as easily transportable as oil, so its markets tend to be local or regional. Also, we are finding more and more natural gas, both here and abroad, so there is plenty of supply and that is one factor driving prices down.
Energy guru Daniel Yergin also covers this issue in "Stepping on the gas":
Today, natural-gas prices are less than half of what they were just three years ago.
Disclosure: Kurt Brouwer owns shares in Vanguard Energy Fund