Earlier this week, the Market Monkey opened up a long position in Natural Gas.
I don't have any indicators that say "this is the bottom." Mostly there is a lot of evidence that says, "this is cheap." I happened to see natural gas stories popping up in a number of places this week, so it's possible that it will garner some buyer attention here. It came up on my stochastic screens and also there have been a number headlines over the last two weeks about Aubrey McClendon's ongoing irresponsible money management at Chesapeake Energy (CHK). Also, natural gas is on the cover of Fortune Magazine this week.
This chart shows how dramatically natural gas prices (in the US) have fallen in the last four years. From $14 to $2.
It's helpful to put that fall in price in perspective. Crude oil has retained it's value in that same period. So we have seen a parabolic rise in the price ratio between natural gas and crude oil.
To me, this says one important thing: Energy is not as fungible as they say it is on TV.
Certainly, it takes some time to convert infrastructure from using oil to natural gas. Energy stored in one form is not easily transferable to another form. (I am optimistic that battery and fuel cell technology will change this the future). But there are lots of capital-rich and rational-acting trucking companies out there that probably see an economic incentive to start converting engines to natural gas vs diesel fuel. That process is likely to start sooner if the price ratio is 50X.
I think the big beneficiaries of this change are households that use natural gas to heat their homes and steel companies that use natural gas to make steel.
There is another other piece of information that is interesting to about the decline in natural gas prices. Its that the cheap price of natural gas is unique to North America. Prices remain around $10 for natural gas delivery in Europe and Asia. This has to be attributable to the recent productivity gains from shale.
One would think that the the price arbitrage pressures have got to become large enough to overcome the financial and energy costs of natural gas liquefaction. ( I know almost nothing about this... does it need to stay compressed to stay liquid? Does this mean you need to build gigantic compressed tankers to move it from one place to another?) Is 5X a different enough price to get the ball rolling?
In any case -- below $2 seems very cheap for a commodity that was $14 in recent memory. Of course there is not much of a floor here. Natural gas could certainly keep falling, but it seems cheap enough to start thinking about.
MONKEY BUSINESS
Buying: BOIL @ $6.65
Holding: RENN ($5.30), AGQ ($79.85, $63.16, $54.10, $60.35), UGL ($91.00), AVL($2.72), NFLX ($74.70), DAG ($11.00)
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