$2 Natural Gas?

By Billy Fisher | August 18, 2009 AAA

On Tuesday, natural gas delivery for September dropped another 2.1% to close at $3.096 per million British thermal units (MMBtu). This close marked a seven-year low for natural gas futures and there are few signs that this trend is anywhere near an end. Could natural gas eventually hit $2.00 MMBtu? A price level that would have been inconceivable as recently as last summer now may not be that much of a stretch. (Read Understanding Oil Industry Terminology for a quick primer on the oil industry jargon.)

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Fall from Grace
The demise of natural gas has been a long, drawn out decline. Last summer in early July the United States Natural Gas Fund (NYSE: UNG) hit a high of $63.89 as the price of natural gas rose to $13.58 MMBtu. Commodities were booming across the board. The United States Oil Fund (NYSE: USO) hit a high of $119.17 as the price of crude topped $147 a barrel.

Once the bottom fell out on the commodity bubble, both of these funds took nosedives. UNG closed 2008 63.7% below its July high. The story was even worse for USO which finished the year down 72.2% from its peak.

Parting Ways
In 2009, oil and natural gas have gone their separate ways. USO has rebounded to the tune of 15.0%, while UNG has continued to flounder. Year-to-date UNG has slid another 48.0%. Natural gas has been plagued by weakened demand amidst the global recession and ballooning stockpiles.

Another factor that has limited the potential for temporary surges in the price of this commodity is the current geographical distribution of U.S. supply of natural gas. In recent years, producers have shifted their work to gas fields away from the Gulf of Mexico and outside of an arm's reach during hurricane season.

Even for investors who are of the opinion that natural gas is due for a recovery, I do not think UNG is the best way to play this theme. I would be more inclined to take a look at a company like Apache (NYSE: APA) that has a healthy mix of both natural gas and crude exposure and is able to modify its production of either commodity based on prevailing market prices. Even Exxon Mobil (NYSE: XOM) would be worthy of consideration after its recent 20-year agreement to supply PetroChina (NYSE: PTR) with liquefied natural gas.

The Bottom Line
The price of natural gas may not reach $2.00 MMBtu, but growing inventories and a lack of demand indicate that a significant recovery is not imminent. On the contrary, it could be a while before underlying fundamentals warrant a turnaround in the price of natural gas. In the meantime, investors might be better served by considering other asset classes for investment opportunities.

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