Prices reflect some sort of "equilibrium" between supply or demand. At least, that's the basic idea -- reflexivity and other factors might complicate that description, but it's a basic enough foundation to approach commodity markets with.
If demand for a commodity suddenly shoots up while supply stays mostly steady, then prices will go up. The real trick is understanding and forecasting said production, consumption, and trying to at least partially account for speculation.
And when it comes to natural gas, all indicators are pointing toward a huge price rally within the next couple of years as the US economy realizes that sometimes you have to pay the piper.
We Have to Understand Coal Prices
It's not exactly enlightening to point out that the Obama administration has essentially led an attack on coal, along with the EPA in general. To try to stay as non-partisan as possible, even Romney isn't pro-coal, giving speeches before running for president where he pointed at a coal plant claiming it killed people.
That said, for purely economic purposes, I love coal. There's tons of it, it's tried and true, and, well, there's tons of it. Plus, we have a lot of coal. The only problem is that the pollution probably isn't healthy and the environmental cost isn't exactly going to please the green agenda anytime soon.
Coal consumption has been down recently, with consumption being about where it was in 2000 in 2010. This means it increased throughout the decade, then fell off drastically 2009. It bounced back up a little in 2010, then fell even further in 2011 to a 30-year-low.
This doesn't mean other sources are necessarily able to keep up right now -- but it's an important trend. We can't delete our ability to use some resources -- or greatly hinder them -- and not see other resources go up because of it. We have to keep the lights on, and that means good things for natural gas while coal is being attacked on all fronts.
Vehicles Starting to Switch
Different companies around the nation are starting to make the switch to natural gas vehicles. A couple of years ago, I rarely saw any natural gas vehicles -- now I see them constantly, and a natural gas station was built just a few miles from where I live. This is obviously anecdotal, but it's also reflecting an important trend.
For example, Waste Management (WM) is switching to natural gas for most of its fleet over the next 5 or so years. That's a big deal. I've written about Waste Management's stock price in the past, and have put it on a hold analysis.
The Natural-Gas to Oil Ratio
I'm not a huge fan or asset ratios, because I think they're borderline useless, but for those who put some stock in them, natural gas is about 3 times cheaper compared to oil than it usually is. The historical ratio is that natural gas is typically 10 times cheaper, but lately it's been in the 30 range.
How to Get Exposure
Getting exposure to natural gas can be done a variety of ways. I've already written about Chesapeake (CHK) and why I think the CEO has messed up what would be otherwise and absolutely wonderful almost-certain investment.
Still, Chesapeake isn't the only company with natural gas exposure. Finding a boring, steady company that pays a steady dividend and adding a position regularly for the next several years is likely to do absolutely wonderfully, and is what I personally plan on doing.
Futures contracts could also work, but most of the trends listed here aren't just short term trends -- some can take years, if not 5 or more years. This is about a long-term trend, and prices so low that in twenty years you'll be glad you bought -- or kicking yourself if you don't.