Thursday, August 27, 2009

As Oil Explodes, Why Natural Gas Prices Stay Low (And: Investment Ideas are Everywhere!)

This may be the first time I've linked to Time Magazine since their infamous Iwo Jima cover*. From Time:

Bargains only last so long, even in this recession. Sorry, T. Boone Pickens.

To delve deeper, let's examine why gas prices have deflated so much: Natural gas prices and oil prices are no longer bedfellows in our present economy. As crude oil has skyrocketed from about $30 per barrel in December 2008 to over $70, natural gas has plummeted from nearly $6 per million BTU to under $3, recently setting a seven-year low. To put these numbers in perspective, this makes oil over four times as expensive as natural gas to produce the same amount of energy, according to the U.S. government's Energy Information Administration (EIA). (Read "Clean Energy: U.S. Lags in Research and Development.")

Long story short, this year we are going to have more natural gas than we need — or potentially even store.

That's no reason to party. Here's why: Unlike the global crude oil market, the natural gas market is incredibly localized. The United States produces nearly 90% of what it consumes, and the rest is imported from Canada or from overseas — the latterd amounting to only about 2.5% of U.S. consumption. Thus, a glut of domestic gas doesn't really affect imports.

Nor can we quickly expand gas consumption. At this stage, anyone who can use natural gas instead of crude oil is already burning gas, as the price goes lower still. There is really only one other form of energy natural gas will replace — coal. Yes, in some geographical areas, it is currently cheaper to use natural gas than coal. Shocking, right?

So demand for gas, despite its low price, stays relatively low. Then layer on the effects of the recession: Gas-intensive industrial production is down 12.8% since this time last year, according to Barclays Capital bank estimates. On top of that, there's weather: This has been a cool summer in much of the United States, so less natural gas has been burned for electricity to power air conditioning than in recent years....MORE
HT: Environmental Capital

*You never know where you'll get an investment idea. From our May 6 post "Time Magazine Fete: Economic Zeitgeist? And: Time's Iwo Jima Cover":

...Speaking of zeitgeist, last year when Time Magazine used Joe Rosenthal's iconic photo of the flag raising on Mount Suribachi on their cover of the 'Special Environment Issue', I had a few thoughts:

1) These guys are really out of touch.

2) These guys are really uncreative.

For a media company, either of those facts would be a good reason to short the stock. Combining both in the same business made it a lock. I didn't say so though (I didn't put the picture on the blog either). Instead my comment was:

"...Among the Americans who served on Iwo island, uncommon valor was a common virtue."

-Fleet Admiral Chester W. Nimitz
Commander-in-Chief, Pacific Fleet
Communique No. 300
17 March 1945*

*CINCPACFLT Communique No. 300, World War II Command File, Operational Archives Branch, Naval Historical Center.

It's been a bit over a year since the cover, let's see how the stock (TWX) did versus the Standard & Poor's 500:

Chart for Time Warner Inc. (TWX)

Hmm. Seems to have underperformed by about eighteen percentage points.

Sometimes investing is easy.