One commodity ready to take off
Mar 24, 2009
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Commodities have taken a beating – down 60% since last July.
But one commodity has performed worse than any other: natural gas. Since last July, the price of natural gas has fallen 75%, from $13.50 to $3.50. Natural gas is still testing new lows, while most other commodities – including oil – have bounced significantly from their bear-market bottoms late last year.
Natural gas is so cheap right now, it's not economical for drillers to bring it from the ground. Major gas producers, such as Chesapeake Energy and Devon Energy, are idling rigs and slashing drilling budgets.
Last summer, when natural gas prices were at $14 per thousand cubic feet (mcf), 1,600 gas rigs in the United States were pumping gas onto the market. As of 13 March, only 884 rigs were operating. This means supplies will soon start to shrink.
Meanwhile, low prices are stimulating demand. Last week, AT&T announced it was spending $565 million on 15,000 natural-gas-powered vehicles. It'll save millions per year in fuel costs and earn millions in tax credits. Other companies will follow. Taxis and buses will convert next. Then, we'll see 18-wheelers begin to run on gas.
But the big driver of natural gas demand will be the electricity industry. The new government is pushing alternative energies such as solar, wind and hydroelectricity, and taxing traditional power industries such as coal. The more the government funds alternative energy, the more important natural gas becomes to the economy.
The decline in rig counts will soon lead to a shortage of natural gas, and prices will shoot back up again... just like they always do. Seven years ago, for example, producers cut their drilling rig count at a similar pace to today's cuts. Natural gas prices rose 86% the following year.
I expect the rise in gas prices is imminent. Gas prices track oil prices. Oil has risen 43% since Christmas. Gas has to catch up. Also, speculators have bet so heavily against natural gas prices, they're breaking historic records. Right now, speculators have huge positions against the commercials (or the actual fuel users). When speculators are all on the same side of the trade, a violent reversal is near.
Here's the bottom line: When a commodity is unprofitable for producers, you need to invest in it immediately. When a commodity is unprofitable, the industry shrinks, leaving only the most efficient firms in operation. Supply collapses. Prices rise. This is what we're currently seeing in the natural gas business...
The natural gas ETF's symbol is UNG (NYSE:UNG). I think this ETF is about to see a major rise. You could also look toward natural gas drillers to profit off the trend.
Natural gas may not go back to $14 per mcf any time soon... But it's so oversold right now, it would be hard to lose money buying at these prices.
• This article was written by Tom Dyson for the free daily investment newsletter
DailyWealth
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