How To Play The Natural Gas Trend

Includes: ETE, KMI, KMP, WMB
by: David Fessler

I was up at my hunting and fishing club this weekend enjoying the fall colors. They were at their peak in the Pocono Mountains here in Northeast Pennsylvania. It was cold enough that the furnace kicked on at night. All three of our buildings are heated with oil. We just topped off our tanks. If you live in the Northeast, you might want to do the same. I’ll get to that in a moment.

Regular readers know I write a lot about factors that will continue to keep an upward bias on the demand for natural gas. Utilities switching old power plants over and building new ones to run on it are a big factor. The increasing use of natural gas as a source of transportation fuel will be, too. But home heating isn’t something I’ve addressed thus far. However, recent statistics published by the Energy Information Administration point to a big swing away from heating oil towards natural gas.

Natural Gas and Home Heating Costs

About 5.7 million households in the Northeast United States use heating oil to keep warm in the winter. Seven years ago, that number was 6.9 million. That’s a decrease of 21%.

About half of those 1.2 million people switched to natural gas. Check out the graph below. (Click to enlarge)

Natural Gas vs. Heating Oil - Home Heating Costs

The peak of the oil-to-gas switch occurred three years ago, but the EIA is forecasting the changeover to begin rising again this coming winter as oil prices increase. Why? Because heating oil prices are largely reflective of those for crude. It’s easy to understand why people are considering the switch when you consider the following graph of crude oil and natural gas prices.

Both are expressed in dollars per million Btus, so we can directly compare the two.

Heating Oil Prices vs. Natural Gas Prices - Home Heating Costs

It’s easy to see from the graph above that heating oil costs nearly twice as much as natural gas. Even installing a new furnace pays for itself very quickly under those circumstances.

From a historical perspective, the difference is even more dramatic. The average price for crude back in 2003 was $24 per barrel, and this year so far the average is $99 per barrel. The prices for natural gas on the other hand, while on the rise through the 2008 heating season, fell dramatically ever since. This was largely due to the glut of gas on the market as a result of unconventional shale gas production. Natural gas prices are about 20% lower this year than back in 2003, exacerbating the disparity between it and heating oil.

Heating Oil Prices To Set Winter Records

The EIA predicts that heating oil prices will set a new winter record this year. The EIA forecast shows a 10% increase over last year’s prices for the heating oil season, which runs from October through March. While natural gas is expected to rise 5% this winter, that’s from seasonal demand more than anything else.

Any global supply disruption in the flow of oil could send heating oil prices even higher. For consumers contemplating a switch to natural gas, this just might be the best time, before the really cold weather descends on the Northeast.

The bottom line for investors though, is that this switch over to natural gas is one more factor that’s actually reducing our use of oil and increasing the use of natural gas. In addition, the newer furnaces most consumers install are far more efficient than the ones they’re replacing, adding to the savings.

There are companies that can take advantage of these trends. I recommend that you keep an eye on pipeline carriers and producers like Kinder Morgan Energy Partners LP (NYSE: KMP), which recently announced the acquisition of El Paso Corporation (NYSE: EP). You can also monitor Williams Companies, Inc. (NYSE: WMB) and Energy Transfer Equity (NYSE: ETE); both produce, transport and store natural gas.

If you live in the Northeast and heat with oil, an investment in one of the above companies might be just the ticket to “warm” your portfolio and offset some of the higher heating oil prices you’ll likely be paying to heat your house this winter.

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