Quick, what is the single worst-performing "anything" in the world of investments right now? If you said chocolate covered cockroaches, you would be close but still way off. Actually I think there might be a premium for those tasty tidbits these days.
Okay, well, in my book natural gas has got to be the worst performing investment in the last few years, bar none. Of course if you have been on the other side of that trade, then obviously you have been completely correct.
I am not a commodities guy. I just have not gotten involved in it ever since the silver market was being manipulated back in 1980 by the Hunt brothers. That being said, how can anyone not see the virtual collapse in the natural gas market?
Check out this recent chart from Bloomberg Businessweek:
Now this chart is just for one year. Back in 2008 the price was around $10 per 1,000 cubic feet! This article states that it might even be too cheap to drill for.
".....Essentially, gas is so cheap that it's no longer profitable to drill."
The article continues:
"Producers typically need $5 [per 1,000 cubic feet] to break even," says David Greely, an energy analyst at Goldman Sachs (GS). The industry hasn't seen prices consistently over $5 since September 2010, back when there were nearly 1,000 rigs operating in the U.S. The number of gas rigs peaked near 1,600 in mid-2008, when prices peaked at $10. (The boom was effectively confirmed in June 2009, when a Colorado School of Mines report showed that U.S. natural gas reserves were 35 percent higher than previously estimated.)
Is everyone losing money in this sector? Why would any company continue to fight for the rights to explore and drill for natural gas? Do they know something that the rest of the world is oblivious to?
I think they know one crucial point. The price of gas today is not going to be the price forever, and the upside potential is enormous. Not just for the companies involved in exploration, discovery and retrieval, but for the USA itself and the rest of the world.
"Still, a fair amount of activity persists in the field. Low borrowing costs have helped spur a healthy appetite to invest in gas drilling despite low prices, with a lot of funding coming from equity markets and in the form of joint ventures. According to Greely, producers have continued drilling, despite low prices, in an effort to expand volume and hold on to leases, which require that they continue drilling."
All of this makes for a compelling argument that we could become not only energy independent here in the US, but we could be the world's largest exporter of cheap energy. Clean, cheap, abundant energy.
There has been resistance, however, as noted by T. Boone Pickens in this article which reports a recent interview Pickens had on CNBC;
Billionaire oilman T. Boone Pickens is fighting to get government trucking fleets to switch to cheap and plentiful natural gas. Most politicians don't care, he says.
"When this one's over for me, I am through with Washington," says Pickens, according to CNBC.
The article goes on to support my own opinion;
Natural gas is abundant in the U.S., and some say the country could even export natural gas thanks to the size of the shale deposits, although critics say the use of new technologies associated with fracking pollute both air and water. *(not proven by the way)
The U.S. Department of Energy estimates that 482 trillion cubic feet of natural gas lies beneath the ground in the U.S., which at the current rate of consumption, represents a 90-year supply.
This article sums up Aubrey McClendon's viewpoint quite succinctly:
Mr. McClendon's life's work is promoting a natural-gas boom that is remaking America's energy market and much of the economy, if politics and a natural-gas glut don't interfere. So many people are drilling so many wells and the past winter was so warm that natural gas is trading at around $2 per 1,000 cubic feet, down from a high of more than $15 as recently as December 2005.
By now you can see where I am headed with this, right? When everyone is selling and everyone hates it, that to me is when we should be buying. Especially when the largest corporations on the planet are continuing to pursue ever increasing supplies.
The question is, how do we "play" this?
Well, as everyone who reads me knows, I am not a fan of ETFs, but in this case I am going to suggest what I consider to be the best way to profit in the long run from an investment in natural gas: The United States Natural Gas ETF (UNG).
Look at this chart:
Pretty cool, huh? Today's unit price was $17.32, with a 52 week high of $50.56 as the price was collapsing. When (not if) the price of natural gas rebounds, to let's say $3.50-5.00 per 1,000 cubic feet, I think the price of this ETF can triple or quadruple from the current levels.
I have no idea if the all-time highs can be reached, but certainly if the USA becomes the exporter to the world, even a quadrupled price from here could be eclipsed.
I am no soothsayer. I do not even know if I will be right. What I do know is that if it is good enough for the biggest corporations to keep building inventories and pouring money into more exploration, then it might be worthy of our attention for some sort of allocation in our portfolios.
This is a long term play, not a trade for a few quick bucks, so keep that in mind when you do your homework.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UNG over the next 72 hours.