eResearch Blog: Natural Gas: Time to Buy?
Natural Gas: In the Doldrums Presents a Fabulous Buying Opportunity
The price of crude oil reached a new all-time high last week: US$95.93 per barrel. Natural gas continues to remain depressed, with the Henry Hub at US$6.63 per MMBtu.
The depressed natural gas price is attributed to moderate temperatures particularly in the eastern part of North America, the end of the 2007 hurricane season with little damage, and ample supplies of natural gas in storage. Current storage is about 3,500 Bcf, which is about 11% above the 2002-2006 five-year average.
According to the U.S. agency, Energy Information Administration, Office of Oil & Gas, this coming winter will be colder than last year, and should lead to the average U.S. household paying about 10% more for natural gas (6% price increase and 3% consumption increase).
The EIA predicts that, with the coming of the winter season, natural gas prices will rise by January 2008 to about US$8.40 per MMBtu. That is almost 30% higher than the current price.
Natural gas prices are probably more related to weather factors than most commodities. Since weather is highly unpredictable, price swings usually tend to be overdone, both on the upside and the downside. There is a similar effect on natural gas equities. This provides the astute investor with exceptional risk/reward opportunities.
Compared to the price of crude oil, natural gas appears undervalued, and has been for quite some time. The general rule-of-thumb is that the price correlation between the two should be 10-to-1. The current ratio is US$95.93 to US$6.63, or 14-to-1. Thus, either crude oil is over-priced, or natural gas is under-priced, or some combination of both.
We believe the “play” is in natural gas.
Canada’s National Energy Board, however, in a recent report predicted that natural gas output in Canada will decline up to 15% by 2009 due to low expected natural gas prices and continuing high finding, development, and operating costs. True, many Canadian natural gas operators cut back their drilling activities in 2006-2007, and primarily due to the low price environment. However, it is our opinion that, as the price of crude oil goes ever higher, as predicted in numerous places, it will drag the price of natural gas higher with it. Let’s face it, the price of natural gas currently is trading well below its long-term replacement cost. But demand continues fairly steady, at about 2% per year. The tremendous deep-water drilling activity that has been going on in the Gulf of Mexico for the past 3-4 years is about to be realized in terms of increased supply infrastructure.
The Conference Board of Canada predicts that natural gas prices will rise about 6% per year. This forecast is based on a number of factors: (1) low production from new gas wells; (2) depletion from older wells; (3) new electricity generation is usually gas-fired; (4) supply is flat, and demand is rising; and (5) general economic growth increases overall energy consumption. On the negative side, large increases in the supply of liquefied natural gas could disrupt an increase in the natural gas price, but increased LNG supplies seem to be some way off yet.
In all, we think that high-quality natural gas companies offer investors an exceptional opportunity at the present time. Always buy ‘em when nobody else wants ‘em.
Please visit us at "www.eresearch.ca"
Bob Weir
Director of Research
The price of crude oil reached a new all-time high last week: US$95.93 per barrel. Natural gas continues to remain depressed, with the Henry Hub at US$6.63 per MMBtu.
The depressed natural gas price is attributed to moderate temperatures particularly in the eastern part of North America, the end of the 2007 hurricane season with little damage, and ample supplies of natural gas in storage. Current storage is about 3,500 Bcf, which is about 11% above the 2002-2006 five-year average.
According to the U.S. agency, Energy Information Administration, Office of Oil & Gas, this coming winter will be colder than last year, and should lead to the average U.S. household paying about 10% more for natural gas (6% price increase and 3% consumption increase).
The EIA predicts that, with the coming of the winter season, natural gas prices will rise by January 2008 to about US$8.40 per MMBtu. That is almost 30% higher than the current price.
Natural gas prices are probably more related to weather factors than most commodities. Since weather is highly unpredictable, price swings usually tend to be overdone, both on the upside and the downside. There is a similar effect on natural gas equities. This provides the astute investor with exceptional risk/reward opportunities.
Compared to the price of crude oil, natural gas appears undervalued, and has been for quite some time. The general rule-of-thumb is that the price correlation between the two should be 10-to-1. The current ratio is US$95.93 to US$6.63, or 14-to-1. Thus, either crude oil is over-priced, or natural gas is under-priced, or some combination of both.
We believe the “play” is in natural gas.
Canada’s National Energy Board, however, in a recent report predicted that natural gas output in Canada will decline up to 15% by 2009 due to low expected natural gas prices and continuing high finding, development, and operating costs. True, many Canadian natural gas operators cut back their drilling activities in 2006-2007, and primarily due to the low price environment. However, it is our opinion that, as the price of crude oil goes ever higher, as predicted in numerous places, it will drag the price of natural gas higher with it. Let’s face it, the price of natural gas currently is trading well below its long-term replacement cost. But demand continues fairly steady, at about 2% per year. The tremendous deep-water drilling activity that has been going on in the Gulf of Mexico for the past 3-4 years is about to be realized in terms of increased supply infrastructure.
The Conference Board of Canada predicts that natural gas prices will rise about 6% per year. This forecast is based on a number of factors: (1) low production from new gas wells; (2) depletion from older wells; (3) new electricity generation is usually gas-fired; (4) supply is flat, and demand is rising; and (5) general economic growth increases overall energy consumption. On the negative side, large increases in the supply of liquefied natural gas could disrupt an increase in the natural gas price, but increased LNG supplies seem to be some way off yet.
In all, we think that high-quality natural gas companies offer investors an exceptional opportunity at the present time. Always buy ‘em when nobody else wants ‘em.
Please visit us at "www.eresearch.ca"
Bob Weir
Director of Research
posted by Bob Weir at
1:10 PM
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