Tickers in this Article: BP, IDT, VDE, FCG, CLNE, FSYS, MLPG, EPB, MWE, WSTE, PHO, IEO
Despite the run-up in variety of commodities, natural gas hasn't followed suit. Like oil, corn and copper, natural gas fell sharply during the financial crisis, but unlike its commodities sisters, it has not recovered. Currently, natural gas can be had for just over $4 per million BTUs. That's still well under its 2008 peaks. For portfolios, the natural gas sector has been a tricky place for investment. The long-term promise is good and recently investors received a huge vote of confidence highlighting that potential.

TUTORIAL: Exchange-Traded Funds

A Bullish Forecast
According to the International Energy Agency recent events have set the stage for or a "golden age of gas." This past Monday, the agency reported that the right combination of factors could set the stage for natural gas revolution. New sources of abundant supplies, Europe's recent sour sentiment towards atomic energy and the continued fall-out from the Fukushima nuclear disaster coupled with rising demand from emerging markets such as China, has the agency bullish on natural gas for the long term. The IEA estimates that global consumption of natural gas will rise by more than 50% over the next 25 years. Overall, the fuel source will account for more than a quarter of global energy demand by 2035, up from 21% now. This echoes similar projections made by BP (NYSE:BP) in the beginning of the year.

Seen as cleaner alternative to coal and oil, natural gas is gaining traction globally. New horizontal drilling techniques and the ability to tap various shale formations are helping drive that growth. Malaysia's state-owned oil company, PETRONAS, has recently entered a deal to buy three Canadian shale gas fields and start construction of an LNG gas export terminal on the British Columbia coast. In Israel, the nation has partnered with IDT (NYSE:IDT) to use new drilling methods to begin extracting its rich gas resources.

Natural gas is also poised to grow as a fuel source for vehicles. Compressed and liquid natural gas vehicles are widely used in a number of countries outside of North America, including Southwest Asia and South America. However, less than 1% of all vehicles currently use these fuel sources. In the United States, that could change. Congress has proposed the bipartisan New Alternative Transportation to Give Americans Solutions of 2011 or the NatGas Act 2011. The bill included numerous provisions such as a tax credit of up to 80% of the cost of buying a natural gas vehicle as well as infrastructure components.

Playing That Golden Age
With natural gas's long-term potential continuing to grow, investors may want to consider the sector. Blanket plays such as the Vanguard Energy ETF (NYSE:VDE) or First Trust ISE-Revere Natural Gas (NYSE:FCG) make excellent starting points for investors looking for nat. gas exposure. However, there are plenty of other options as well.

Both Clean Energy Fuels (Nasdaq:CLNE) and Fuel Systems Solutions (Nasdaq:FSYS) allow investors to tap into the growth of natural gas as transportation fuel. Clean Energy Fuels operates fueling stations and supplies both fleet operators and the general public with compressed and liquefied natural gas. Fuel Systems manufactures the equipment needed for vehicles to run on LNG.

Without the proper infrastructure, the best laid natural gas plans won't come to fruition. The UBS E-TRACS Alerian Natural Gas MLP ETN (Nasdaq:MLPG) tracks 15 of the largest pipeline and storage companies related to nat. gas including El Paso Pipeline Partners (NYSE:EPB). Shares of the ETN yield 5.6%. Similarly, MarkWest Energy Partners LP (NYSE:MWE) holds significant pipeline operations in Pennsylvania, right in the thick of the famed Marcellus shale.

The new drilling technique of hydraulic fracturing involves the use of high pressure water and chemicals in order to crack the shale rock. Disposing of these used fracking liquids and other waste created in the drilling process, will benefit the major environmental service companies. The Global X Waste Management ETF (Nasdaq:WSTE) offers a play on the entire waste industry. In addition, the PowerShares Water Resources (NYSE:PHO) could see a boost as the water used in the process needs to be cleaned before returning to our aquifers.

The Bottom Line
Despite the recent short-term hurdles, the EIA's recent report helps highlight the long-term potential for natural gas. With long-term demand set to surge, investors may want to consider adding the sector as it has not rallied like other commodities. The previous stocks along with funds like the iShares Dow Jones US Oil & Gas Index (NYSE:IEO) make excellent ways to play the trend. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center