Commodities Outlook For The Remainder Of 2012: Natural Gas
  1. Commodities Outlook For The Remainder Of 2012: Introduction
  2. Commodities Outlook For The Remainder Of 2012: Different Story In Second Half
  3. Commodities Outlook For The Remainder Of 2012: Energy
  4. Commodities Outlook For The Remainder Of 2012: Natural Gas
  5. Commodities Outlook For The Remainder Of 2012: Coal And Uranium
  6. Commodities Outlook For The Remainder Of 2012: Precious Metals
  7. Commodities Outlook For The Remainder Of 2012: Base Metals
  8. Commodities Outlook For The Remainder Of 2012: Agriculture
  9. Commodities Outlook For The Remainder Of 2012: Conclusion

Commodities Outlook For The Remainder Of 2012: Natural Gas

Natural gas accounts for approximately one-fourth of the world's energy production. Since it is a much greener source of energy than oil and coal, it is picking up popularity. Natural gas has many uses including heating homes, but the largest percentage is industrial usage. Fertilizer, steel and explosives are just a few examples. By understanding how it is used, an investor would be more effective in predicting natural gas prices. It is also a good guide as to what industries would benefit from lower prices. Lower natural gas prices have helped decrease costs in producing nitrogen fertilizer. The recent drought has hurt the U.S. corn crop (which will be addressed later in this article). Corn requires a significant amount of water and fertilizer. Corn prices have risen significantly over a short period of time, so look for an increased usage of natural gas in preparation for the next corn crop. The big decline in natural gas prices isn't just from increased supplies from unconventional natural gas plays, but also due to poor economics in the U.S. When the economy recovers, we will see the price of natural gas increase. A way to follow industrial usage is through the producer price index (PPI). Being clear, this will not cause the price of natural gas to increase to 2008 levels. I believe we could see prices rise into the $4 range.

The price of natural gas averaged $4 per 1 million Btu (MMBtu) in 2011, but continued to decrease through this year. Since May, the price of natural gas has increased 15% until August, and during this time the price of natural gas increased to over $3. This trade has been volatile. On August 2, we saw the biggest decline in the price of natural gas future since 2009, in an 8% move.

The rebound in natural gas pricing has been the move of drilling rigs from natural gas dominant plays to liquids rich. Supply and demand metrics have brought the price of natural gas down to a point that most of the U.S. plays are not economical. Much of the natural gas produced in the U.S. is a product of unconventional resource plays. This means the majority of this energy source is retrieved in the first five years, with the first year by far being the best. Since these wells deplete quickly compared to vertical wells, production should pull back quickly. In the second quarter of this year, the U.S. natural gas rig count decreased 18% from the first quarter. Since October of 2011, that rig count is down 42%. The rigs moved to liquids rich plays which also produce natural gas. Because of this, we could still see decent amounts of gas being produced. Here are a few liquids rich plays and the percentage of resource produced by it.

Location Oil %
Natural Gas Liquids %
Natural Gas %
Eagle Ford (Oil Window) 78
10
12
Bakken (Mountrail) 92
6
2
Permian (Wolfcamp) 42
30
28
Barnett Combo 41
44
15


The Bakken is an exception to this group as the others produce a decent percentage of natural gas and natural gas liquids. Both the Permian and Barnett are combo plays and produce much smaller amounts of oil per well. Obviously the combo plays are not nearly as appealing after the 20% pullback in the price of natural gas liquids, but many are still good enough to keep drilling. Given the current environment in the U.S., I have natural gas averaging $2.95 for the rest of the year. And given the volatile nature of today's pricing we will see big moves. Look for natural gas to average $3.75 in 2013.

Just as WTI differentials to Brent are helping the refiners, a low natural gas price creates the potential for exporting. Natural gas is not a globally traded commodity. As a gas, it takes up too much space to be placed on a ship and sent overseas. Instead pipelines transport gas to Canada and Mexico. If natural gas is cooled to -260 degrees Fahrenheit, it becomes a liquid. In liquid form, it takes up one-six hundredth the space. It can then be loaded on a tanker and shipped to other markets. It takes roughly $3 to $4 for 1 million Btus to convert this gas to liquid and ship it overseas. Overseas, natural gas prices are much higher than in the U.S. In Europe it sells for $12 to $13, and $17 to $20 in Asia. Currently, liquefied natural gas export terminals are being built in the U.S. and Canada. Once these terminals are completed, we will see the price of natural gas in the U.S. increase significantly, and prices abroad will come down. Another variable that could push the price of natural gas up has to do with motorized vehicles, and T. Boone Pickens has been vocal about the positives associated with natural gas powered vehicles. Given the amount of natural gas in the U.S., it would make sense to convert truckload transportation services. To this point it has been difficult in gaining support from the government, but that doesn't mean it will not happen.

Commodities Outlook For The Remainder Of 2012: Coal And Uranium

  1. Commodities Outlook For The Remainder Of 2012: Introduction
  2. Commodities Outlook For The Remainder Of 2012: Different Story In Second Half
  3. Commodities Outlook For The Remainder Of 2012: Energy
  4. Commodities Outlook For The Remainder Of 2012: Natural Gas
  5. Commodities Outlook For The Remainder Of 2012: Coal And Uranium
  6. Commodities Outlook For The Remainder Of 2012: Precious Metals
  7. Commodities Outlook For The Remainder Of 2012: Base Metals
  8. Commodities Outlook For The Remainder Of 2012: Agriculture
  9. Commodities Outlook For The Remainder Of 2012: Conclusion


RELATED TERMS
  1. Collateralized Mortgage Obligation - CMO

    A type of mortgage-backed security in which principal repayments ...
  2. Financial Modeling

    The process by which a firm constructs a financial representation ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based ...
  6. Derivative

    A security with a price that is dependent upon or derived from ...
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  3. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. Can hedge funds outperform the market?

    Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center