Natural Gas Prices Are Here To Stay

Feb. 06, 2014 5:32 AM ETCHK, DVN, EIA, UPLCQ, UNG7 Comments
Jonathan Fishman profile picture
Jonathan Fishman

This winter is a harsh one in the U.S. At the beginning of January, a massive cold wave (which actually started in December) swept across the country. It was so bad, this cold wave even got its own Wikipedia article. On January 5, the temperature in Green Bay, Wisconsin was -18°F, the coldest temperature recorded since 1979. Chicago saw the temperature dive to -16°F, the lowest temperature since 1884, which was matched only once before, in 1988. Luckily, I live in warm Israel, where if the temperature drops to the low 50s - high 40s, it's considered to be a horrible winter.

By now, you are probably wondering, why am I reading about the weather in Seeking Alpha? I believe that a few factors (including extreme winter) kicking in just about now are supporting high natural gas prices in the U.S. (Henry hub prices). These high gas prices can dramatically improve natural gas drillers' profitability. Let's go through the events that are just now kicking in.

Natural Gas Inventory

Natural gas inventory in the U.S. is monitored weekly by the Energy Information Administration (EIA). Back in 2008, when the run to exploit huge reserves of natural gas in the U.S. was underway, natural gas prices took a dive. From the high of June 2008 of $12.69 per mbtu, prices went down to as low as $1.95 in April 2012. At this price, most drillers were selling gas at a price point that was below their cost, thus bleeding money. The strategic decision of most drillers was, to start drilling more oil, and less gas.

These are the gas inventories of the U.S. lower 48 states. You can see that when prices hit an all-time low in April 2012, there was a huge oversupply of gas in the market. Drillers rushed to cease drilling new

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Jonathan Fishman profile picture
I am a highly trained professional equity analyst. My specialty is finding companies with excellent ratios of risk to reward. Before going independent, I was the head analyst at a boutique Israeli hedge fund. Today I am a consultant to several multibillion-dollar firms. I have covered many sectors, including technology, solar and semiconductors. I have learned to connect the dots and discern how forces in these various industries will affect individual companies. I am a big believer in analyzing investments from the top down. This means identifying themes and trends that can reveal where industries and individual companies will be in the future. There are no magic formulas for this process, just a lot of hard work. After I've found a company, analyzed it and concluded its value, then it is just like a poker game with endless cards. All we have to do is sit and wait for the next card to reveal itself and adjust our thesis accordingly. Once we find the true value of a company, we must ignore day-to-day market chaos. If we have done our research properly, we do not need to worry if the Dow goes up or down a particular day, week or month. Peter Lynch, Ben Graham and Phillip Fisher are my biggest influences. I encourage anyone who wishes to learn more about the market to read any of their books.

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