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Natural Gas: Clean Fuel with a Dirty Little Secret

It's unfortunate that those who talk about an imbalance in supply over demand fail to add the important qualifier, "at a given price." As natural gas prices fall, not all known reserves can be recovered profitably. Those who believe the U.S. has "massive" supplies fail to take into account the price factor. At $13/mmbtu, well, yes, the supplies would be massive. At $7, any glut would disappear shortly, especially as the winter heating season approaches. Given the energy relationship between natural gas and crude oil, Pickens plan makes sense to convert to the use of natural gas as an automotive fuel (initially it would be limited to fleet vehicles or vehicles that are driven only in a local area). But this limited additional use (think about mail and parcel delivery as an example) would make a huge difference in natural gas demand at current price levels and would probably be a much better solution than adding subsidized ethanol to gasoline.

Investors appear to be pricing stocks like CHK on the notion that there is too much supply (at current prices) in relation to demand. But CHK engages in very skillful hedging operations (most of the time, but not in the last quarter) that usuallly enhance earnings. In the last quarter, when gas prices rose well above their expectations, the hedging worked against CHK. Predicting future CHK earnings depends not only on the hedging operations but on the price of natural gasl.