- Median price of NAT GAS over the last 12 years is $5.28.
- NAT GAS is the only asset that kept falling after 6th Mar 2009.
- all th bad news are already captured into the current price (too much storage, no hurricanes, no economic recovery unil the end of 2010, too many drills, warm winter, etc)
- the potential good news are NOT captured at all in the current price (Nat gas is the cleanest raw energy source, oil and coal being much worst; Natural GAs companies started to lobby in Senate for NAtural GAs incentives and to be promoted as the cleanest energy source)
- The caloric ratio and the historical price ratio Oil: Nat GAs is 6:1. And keep in mind that this historical ratio does NOT include a premium for Naturla GAs for being a cleaner energy source than oil. If we believe that the cap and trade on carbon emissions wll be implemented, then we should expect the ratio to improve in Natural Gas favor.
Oil is trading at $74 => Nat GAs should be around $12.30. Something is gotta give here: either Oil should come down to $16.8 (6 times $2.80 the current price of NatGas), or Natural GAs will have to rise to $12.30. As a matter of fact he current price ratio Oil:NatGAs is an all-time historical record at 26.4.
Most probable scenario - around Christmas time Oil will come down to around $45 per barrel and Nat Gas wil increase to roughly $7.56. Funny is that my prediction is basically the same as the one made by the XTO Energy President 2-3 weeks ago, which sees a price of $7.50 by Jan-Feb 2010.
Because all the listed ETF based on Nat Gas are rolling over to the next settlement month, then there is a contango risk. For all those pundits that claim that the contango on Nat Gas is too high, I will have to remember them that Nov '09 price is $4.2, Dec '09 is $5.03 and Jan '10 is $5.31.
In the worst case scenario (January 2010) it looks to me that Nat GAs still has a potential price of 42% HIGHER then the the Janury 2010 current price.
For 42% return in 4 months I am willing to take the risk here.
Coming back to the original points of the articl, yes - it seems that the sell in NAtGAs is overdone and indeed it seems that the high volume from this week is the final washout.
Can the price go even lower from here?
1. Yes, but most certainnly no lower then $1.83.
How much time will be the NAt GAs price depressed?
2. Looking at the 2000-2003 recession, Nat GAs reached a bottom in Sep 2001 and then prices started to rebound and after Sep 2002 the NAt GAs price never ever went lower then $3.72.
To summarize - if we were to believe the equity market and if this is gone be a V-shaped recovery, and we are pretty much as in Apr 2004 (at least this is what the global equities market are indicating) then the Natural Gas prices are long overdue for a POSITIVE price correction - meaning that current prices are too depresed for the current and future state of the economy.
If we were to belive the NAtural Gas prices and not the equities markets then it looks like we are exactly as in Sep 2001, point from where it took the equities another 12 months to bottom in Oct 2002.
So, for those of you o believe that we have seen the worst of this crisis and the worldwide equities bottomed in 6-9 Mar 2009, then the current Nat Gas price is making no sense at all at current prices and should be much higher than is rght now.
For those of you who believe that the equities market did NOT bottomed yet and probably will not do so until the end of 2010 and we will see at least a retest of the mar '09 lows, than this coming month is the LAST chance to enter in NAt Gas at depressed prices.
As in regards my personal view, is that I am inclined to believe that we do stand like in Sep 2001 where we are right now and that in the worst case scenario nat GAs prices will be depressed just for one more month. And that the equities market will have to retest the Mar '09 lows. But this is just a subjective opinion, because in reality the equities markets are indicating that this crisis is OVER and we stand right now exactly as in Apr 2004 - in which case, once again, the washout in NAt GAs prices is way too overdone.
EIA has an worldwide average production cost for NAtural Gas for about $7, and for North America for about $9. So, there is absolutely no problem if imports of LNG will be supplied to North American market. On top of that, the $7 production cost worlwide should be increased at least with the maritime transportation cost, processing cost and local distribution cost from LNG facilities. All toghter LNG production and distribution cost raises to at least $8 giving me the confidence that the $7.50-$8.00 price prediction I made earlier is reasonable and probable.
Disclosure: Long GAS and HNU, both on TSX.