If you recall, I was pounding the table on natural gas prices last year when levels reached the $2 mark. Since that’s about half of what it costs to get the stuff out of the ground, that price was simply unsustainable.
Then, when prices dropped close to $3 a few months ago, I reiterated that prices weren’t going to stay there, either.
Today, we’re closer to $4 than $3.
[ad#Google Adsense 336×280-IA]And all indications show that prices will remain above $3 moving forward – and will likely inch closer to $5 within a couple of years.
Here’s why…
Crushing a 40-Year Record
According to BP’s (BP) Chief Economist, Christof Rühl, the single greatest factor for the upward movement for natural gas came from the electric power sector.
In 2012 – while coal use decreased by 12% – natural gas experienced the largest usage uptick of any single fuel in 40 years.
The main catalyst?
Power plant use of natural gas increased by an astounding 20%.
In each of the five years prior to 2012, natural gas usage increased by only about 6.5% on average.
Amazing what a low price can do for demand!
Indeed, reaching low prices was the absolute best thing that could have happened. It forced utilities, consumers and even the government to get behind the fuel. After all, natural gas made businesses more money and cost consumers less money.
However, natural gas production, while solid, isn’t increasing like gangbusters. That’s because it still costs more to produce the gas than the market is willing to pay for it.
By 2015 or 2016, though, this supply/demand imbalance should disappear. For two reasons…
Where to Place Your Bets
First, demand from consumers, utilities and businesses will continue to increase.
Second, the United States will finally be able to export natural gas. This will create a bona fide outlet to the rest of the world – where the price of natural gas is higher than in the United States – sometimes by a multiple of three or four.
At that time, natural gas prices should breach the magical $4 level, thus creating a profit opportunity again.
Bottom line: The natural gas story in the United States is still in its infancy. The companies that stand to benefit the most in the coming years will have a strong asset position in both natural gas and liquids. This allows them to switch production based on market prices.
Chesapeake (CHK), for instance, was able to post stronger-than-expected profits despite the low prices for natural gas. As a result, the company is now up more than 50% since we first covered it. Shares should only continue to blast higher from here.
And “the chase” continues,
Karim Rahemtulla
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Source: Oil & Energy Daily