Why I'm So Bullish About Natural Gas

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I just arrived in Texas yesterday for my latest round of oil meetings.

The crude market continues to absorb accelerations in investment despite of some lateral price movements. That will be an important topic of discussion.

But my interest has moved in another direction.

Natural gas futures closed on the NYMEX on Thursday  $4.14 per 1,000 cubic feet (or million BTUs). We have not seen prices reach these levels in quite some time.  

As crude oil prices exhibit resistance in the face of demand concerns (largely overblown, as I have noted here before), the gas levels are rising quicker than anticipated.

This has a direct bearing on an investor's approach to the energy sector.

What is not happening is any fundamental switch from oil to gas. Crude will be moving up. In fact, the latest analyst indicators point toward increasing prices even in the face of higher surpluses.

But as gas settles north of $4, the prospects for expanding one's investment portfolio continue to improve.

In fact, there are a number of ways to make money as prices continue to rise.

The Surplus is Gone

I am sticking to the forecast that I made about six months ago.

Back then, I suggested that the average futures contract price would come in at $4.36 or better by June of this year and about $4.65 by October. Some are now suggesting this level may be the new normal, while predominant opinion is looking for prices to rise for several years, at least on average.

There are a number of factors that still must play out before we can set an expected floor in the mid-$4 range. Memories of last year's dips below $3 are still too recent. But there have been some interesting developments, and they make it unlikely that we soon revisit those lows.

For one thing, the market continues to drain down what had been a significantly heavy overhang of surplus volume. A more seasonal winter weather pattern has helped the draw down.

The 2011-2012 heating season had hardly been a traditional one. Abnormally warm temperatures, especially in the normally heavy natural gas dependent Northeast, had swelled stockpiles and driven down prices.

Looking back, the losses at the wellhead during this period actually contributed to the rise this time around. The advent of vast new unconventional reserves coming from shale gas and coal-bed methane had thrust operating companies into a cut rate survival competition. Too much production hit a market that did not need it, with the resulting glut serving as a main cause of the pricing decline.

And in this respect, we have another example of what I have been terming the most important change in energy markets to emerge in years. It is now playing out significantly in natural gas and it is the latest example of a major development.

This is all about balance.

Natural Gas Companies Focus on Cost Structure

Unlike the situation in gas experienced in the recent past, this time companies have been reducing the opening of new (or expansion of well debit at existing) drilling pads. These resources can be brought on stream quickly, but the real problem building over the last two years had resulted from the number of additional wells itself.

Once a well is brought on line it is more cost efficient to allow the flow to continue, even if the resulting gas is coming up essentially at margin.

As much as 90% of costs at many pads are a result of expenses incurred before the flow commences. It is cheaper to allow the flow to continue – even as market prices are declining – since the longer the flow, the less cost per cubic foot of production.

Therefore, this primary contribution to depressed prices needs to be addressed at the source. That is, a greater restraint on new drilling actually serves to improve the overall market price of the production resulting.

That brings us back again once again to the standard of balance.

As I have mentioned before, our new market parameters are all about balance. The resulting supply/demand relationship is more sensitive to a series of tradeoffs taking place all along the entire upstream-midstream-downstream sequence.

Sometimes these balance requirements cross energy types (gas instead of coal, renewables serving as backup support for hydrocarbons, biofuels instead of fossil, and so on).

Yet at other times, the balancing is more traditional and occurs within a single energy. In this case, the move addresses basin, region, grade, composition, type, process, or sourcing.

With natural gas, this means addressing a few key factors, including:

    • The point of origin (which basin, serving which gathering, processing, transport, and storage infrastructure);
    • The degree of impurities;
    • Whether the fuel is dry (essentially methane only) or wet (having value added streams);
    • Whether the fuel is from a conventional or unconventional source;
    • The technology required to draw fuel to the surface; and,
    • Whether the gas is free standing, associated (along with what is primarily a crude oil reservoir), shale, tight, coal bed methane or (someday) hydrates.

This latter approach is now underway in the gas market and is the primary reason for the stabilization and improvement in price. Now this is looking even more promising as we survey the increases on the demand side rapidly approaching.

These have been the subject of several treatments in OEI and extend from replacement of coal in power production, through rising industrial usage, advancing as feeder stock for petrochemicals, massive liquefied natural gas (LNG) export markets emerging later next year, and even prospects for broader application as a vehicle fuel.      

We are hardly out of the woods with volatility in natural gas, and the pricing trajectory is not going to be one moving straight up. But it does look like we are now on track for a gradual further improvement.

And with that, the number of opportunities will be improving as well.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. jackie Hatcher | April 15, 2013

    Please keep me informed. I trust you Dr.

  2. buffalokandravi@aol.com | May 7, 2013

    I am not upset I guess I should be glad but everything that seems to be put on the table is old news to me , is it possible for me to be that far ahead of what is newsworthy or am I just lucky.I have a Company with a little 50 Mil$ cap that has made me 2x's my money and on the way to a third, I have been on there money for at least a year and I have never seen a hint or anything from a tech energy person that would or should at least bring things like this to an open forum. You see I have have a Company with Domestic and International patents, also has contracts with world wide clients that all have been renewed or are on the renewal date , and still no mention of an energy whiz and I do not mean that badly , I just can not see that slipping through your fingers. Even next week or the one after the news will be on the cover of Bloomberg and still no mention. Maybe it is a volume or liquidity thing but there checks don't bounce they are there for all to see. So please respond to me with a person to talk to, I have liked your service because it makes me feel like I am on the right track, even though I did not get on the Buffet/Obama Oil Train, that one did get by me and I guess you to. Anyone with that kind of funds getting in energy and owning the builder of tanker rail cars should have thrown up a huge flag. Even his own #'s man said they under estimated the power of oil and that is with White House help, ( no Keystone ) that is the reason not the EPA, Warren will pocket above and beyond 22 Billion$ more than his own estimates which are usually pretty darn tight. So please e-mail me with a phone number and a time to call also with an extension that would be professional, I will be with B P not the one you might think of but the venture capital folks for T.B. Pickens very nice chaps that seem business like and not like many they return there calls. But I want some more insight to this company is why I send you this and no it is not T.B.'s old friend that owns Altima Resources although his land is right in the middle of a China swing but the pride gets in the way of the Yang there quite funny really, America spits Canada what the hell else are they gonna do , they are cornered now and China has the string. Back to us if you have interest please e-mail me a time and number and my office will let me know. Do not worry I return all calls , time zones is the problem if they answer or the money if they don't. Oh and don't pay attention I donate all my dividends to the Cancer/Leukemia Fund through Petrobakken they have nothing to do with this although I do like where they are getting wet now good year for the spring break up but they will shine in Q4 and Q1 2014 no doubt about that as long as the Yang and Encana don't stink up the #'s that will be another seasonal winner . I have said to much just need to know a few answers or thoughts from another energy brain. So an e-mail would be nice if not there will be no pain, just thought there might be another avenue to go down hope you take that the right way.

  3. 000052239050 | June 12, 2013

    WAY TOOOOOOOOOOOOO MUCH TO READ NOT ENOUGH WHAT STOCK TO BUY PLEASE….REALLY TO MUCH..Kiran

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