Natural Gas the Next Big Commodity Trade?

By Investment Contrarians

To put it mildly, natural gas simply doesn’t get as much attention as crude oil, or even gold. Mr. Speculator, my good old friend, once said, “Why would you want to even bother looking at it? The prices have collapsed and have been ranging for years.” It’s certainly true that natural gas prices have come down from where they used to be. Just take a look at the chart below to see what has happened to the price of natural gas in the past few years.

Not very long ago, natural gas prices were trading above $13.00 in 2008. Now, they are below $4.00; that’s a decline of almost 70%. With this, one should really wonder if natural gas has any future. Is this commodity even worth paying any attention to?

As I dig further into the details, I see natural gas prices going higher in the future. When this will happen is very hard to predict, but all the cases are pointing towards that conclusion.

When it comes to evaluating the prices and their direction, the most important factor I look at is the supply and demand, be it for gold, silver, oil, or any other commodity, for that matter. The basic rule of economics suggests when the demand goes up and the supply stays the same or declines, the price increases.

This is exactly what is happening when it comes to natural gas.

Let’s backtrack a little. In the first half of 2013, 39% of electricity in the U.S. economy was created using coal-fired plants. This is troublesome, because the U.S. government is actively seeking to reduce the coal power plants—and America’s reliance on them. This helps to reduce greenhouse gases and control climate change. (Source: Johnson, K. and Tracy, T., “EPA Plan to Curb New Coal-Fired Power Plants,” Wall Street Journal, September 11, 2013.)

If that becomes the case, then the next alternative seems to be natural gas, because it’s “clean.”

The U.S. Energy Information Administration (EIA) expects natural gas consumption in the U.S. economy to grow from 24.4 trillion cubic feet in 2011 to 29.5 trillion cubic feet in 2040. This is an increase of almost 21% in demand over 29 years. (Source: “Market Trends – Natural Gas,” U.S. Energy Information Administration web site, last accessed September 17, 2013.)

As for supply, with natural gas prices suppressed, the producers don’t really have incentive to produce. In addition, they also don’t have any incentive to look for more sites where they can potentially drill. This can potentially cause a supply problem.

Long-term investors really need to keep in mind that there’s always opportunity present, they just have to look for it. Natural gas is just one example. To profit from all of this, investors can look at exchange-traded funds (ETFs) like United States Natural Gas (NYSEArca/UNG). This ETF holds the futures contract of natural gas and tries to track its performance.

Mohammad Zulfiqar

This article was originally published at Daily Gains Letter