There is one profitable trend that will continue for the next five years: cheap and plentiful natural gas.
Natural gas prices are down again — and they will stay down.
Check out the five-year chart.
The price for natural gas jumped 57% in the first half of 2013 over the average price in the first half of 2012.
Right now, contracts for future delivery of natural gas are selling for $3.76 per mmbtu.
In 2012, natural gas sold for an average of $2.39 through the first half of the year.
This dead cat bounce occurred after prices fell steadily from a high of $12.50 in 2008.
As you can see from the chart above, the downtrend broke in the second half of 2012. Natural gas prices have found a floor and are putting in higher highs and higher lows.
This is the definition of a bull market.
We are in a technical uptrend. But don’t expect massive returns if you are long…
Prices are — and will remain — cheap.
One reason for this is higher NG prices decrease demand, especially if coal becomes very cheap. In fact, over the past year, some utilities switched back to burning coal. Peabody Energy (BTU), the blue chip coal producer, reported a 33-cents/share profit, beating the expectation of a 5-cent loss.
Coal demand increased 11% in the first half of 2013. Natural gas consumption decreased 15% over the same period.
BTU’s share price has climbed from $15 to $17 over the past three weeks, though they were down 5% yesterday.
(As an aside, I wrote about this market phenomenon extensively in Energy Investing For Dummies, which I co-authored with the rest of the Energy and Capital team.)
But I digress…
The point of today’s article is to tell you the benefits of cheap natural gas.
Right now, despite the increase in prices from last year, it makes more fiscal sense for companies in the United States to burn off natural gas than it does to bring it to market. Natural gas prices can’t go up because companies need prices to be above $5 per mmbtu for it to be profitable in most places.
Below you will see a nighttime picture of flaring natural gas in North Dakota put out by NASA.
Records show 275 million cubic feet of natural gas goes up in smoke each day in North Dakota. That’s enough to heat more than 1 million homes daily.
The problem is companies that aren’t close to a pipeline can’t afford to bring it to market at $3.70 per mmbtu.
At the same time, natural gas is a byproduct of oil production.
You can transport crude by truck or train, but you can’t transport natural gas that way.
That said, enough natural gas is brought to market from new shale oil production that pure players like Chesapeake Energy can’t afford to produce new NG wells.
In other words, natural gas prices aren’t dependent on natural gas wells.
According to the Houston Chronicle: “Oil and liquids-rich drilling in the Permian Basin and the Eagle Ford is producing as much as 30 percent, or in some cases 45 percent natural gas. That’s natural gas that will be drilled at any gas price. As long as oil prices remain high people are going to drill that.”
It’s a Good Thing!
This might be bad news for some select NG companies, but it’s great news for U.S. manufacturing.
Alcoa (NYSE: AA) saw earnings increase and costs drop. Making aluminum uses a lot of power. Dow Chemical (NYSE: DOW), DuPont (NYSE: DD), and LyondellBasell (NYSE: LYB) also put in strong quarters due to increasing margins based on the low cost of natural gas.
As I said above, I don’t know a lot, but there is one trend that is crystal clear: Natural gas prices will be cheap and plentiful for as far as the eye can see.
And if you see a clear trend in the market, you have to profit from it.
All the best,