Natural Gas

I lost a lot trying to play natural gas last year. I bought the UNG at $38 and sold out much, much lower. I say that to temper excitement as I think Natural Gas is the play of the year. Now I know that the G8 met this weekend and according to the MAINSTREAM MEDIA, they have inflation under control as they have figured out how they can "flip the switch" and call in all of the excess liquidity. The dollar is even moving higher on the word out of the G8. I don't buy that for one second. I think we will see inflation and that will push nat gas much higher. Lets take a deeper look.

Natural Gas is undervalued in comparison to crude oil according to historical standards. Why? Because as panic subsided over crude oil, natural gas became a less viable alternative as it would take massive infrastructure spending to make a transition to power our automobiles. A conversion to natural gas is mandatory in my mind and the price of the commodity will go up as it becomes a reality in the minds of more investors. Crude oil has doubled in the past couple of months and natural gas is still working to put in a bottom. History tells us that this will change and often times these disparities right themselves in a very short time period.

Why has gas stayed down? Inventory levels have stayed surprisingly strong as prices plunged. There were several major finds and the drilling had been completed in these areas which sustained supply over the long haul as demand fell dramatically. The companies owning these wells had spent a tremendous amount of money completing these wells. They were not going to leave it in the ground as prices fell, they are pressured to recover their investment as quickly as possible. As a result, they have been producing the commodity even in the face of major declines in demand.

This trend will NOT continue as demand increase. Sure they will keep producing what they have, but will not be spending extra money to increase production until prices show a sustainable recovery. It is easier to take supply (drilling rigs) offline than it is to put it online. The cost to produce new finds is approximately $3.70 mcf. I would expect that prices would need to be sustained well over $4.50mcf before we see an all out effort to get production back online---and all the while inventories will be declining.

All of this is just the natural demand supply relationship and does not factor in the "panic spiral" that I expect we will see with the dollar/oil relationship. I think as we see the dollar fall (and it will over time in my opinion) oil will rise and Nat Gas will rise even further as it makes up ground in relation to oil. In summary, I think we could see a double in Nat Gas by the end of 2009. I just hope my prediction is better this year than it was last year.