But one commodity has performed worse than any other: natural gas. Since last July, the price of natural gas has fallen 75%, from $13.50 to $3.50. Natural gas is still testing new lows, while most other commodities – including oil – have bounced significantly from their bear-market bottoms late last year.
Natural gas is so cheap right now, it’s not economical for drillers to bring it from the ground. Major American gas producers, like Chesapeake Energy and Devon Energy, are idling rigs and slashing drilling budgets.
Last summer, when natural gas prices were at $14 per thousand cubic feet (mcf), 1,600 gas rigs in the United States were pumping gas onto the market. As of March 13, only 884 rigs were operating. This means supplies will soon start to shrink…
Meanwhile, low prices are stimulating demand. Last week, AT&T announced it was spending $565 million on 15,000 natural gas-powered vehicles. That’s a huge cost saving and tax initiative. Other companies will follow. Taxis and buses will convert next. Then, we’ll see 18-wheel trucks begin to run on gas.
But the big driver of natural gas demand will be the electric industry. The new American government is pushing alternative energies like solar, wind, and hydroelectricity and taxing traditional power industries like coal. The more the government funds alternative energy, the more important natural gas becomes to the economy.
The decline in rig counts will soon lead to a shortage of natural gas, and prices will shoot back up again... just like they always do. Seven years ago, for example, producers cut their drilling rig count at a similar pace to today’s cuts. Natural gas prices rose 86% the following year.
I expect the rise in gas prices is imminent. Gas prices track oil prices. Oil has risen 43% since Christmas. Gas has to catch up. Also, speculators have bet so heavily against natural gas prices, they're breaking historic records. Right now, speculators have huge positions against the commercials (or the actual fuel users). When speculators are all on the same side of the trade, a violent reversal is near.
Here’s the bottom line: When a commodity is unprofitable for producers, you need to invest in it immediately. When a commodity is unprofitable, the industry shrinks, leaving only the most efficient firms in operation. Supply collapses. Prices rise. This is what we’re currently seeing in the natural gas business...
The natural gas exchange traded fund (ETF) trades on the New York Stock Exchange under the ticker symbol UNG. I think this ETF is about to see a major rise. It’s also worth considering natural gas drillers to profit off the trend.
Natural gas may not go back to $14 per mcf any time soon... But it’s so oversold right now, it would be hard to lose money buying at these prices.
Good investing,
Tom Dyson
For The Right Side
Note: Tom’s article originally appeared on the Daily Wealth website.
MARKET NOTES
China will pip the US to the recovery finish line
BY SHIVVY ARORA
As US consumers bury their wallets deeper in their pockets, in China, it’s spend, spend, spend…
The chart below tracks retail spending in China (black line) versus the US (red line), from 2000 to date. Any point that you pick along the chart shows the yearly percentage change (growth or decline) in consumer spending.
You can see that Chinese consumers have kept on buying in contrast to western consumers.
China’s consumers continue to shop…
The country’s exports may have taken a massive hit from the crisis, but domestic demand remains high. Real retail sales (excluding autos) are up 19% over the year to January, while US sales are down 4%.
The Chinese government’s aggressive stimulus plan, which started in November, has been focused on stoking domestic demand. The package also places high importance on infrastructure spending and subsidies to key industries. The ‘feel good factor’ this creates is rubbing off on consumers, which leads to continued spending.
Higher retail spending is an important indicator suggesting economic activity is already picking up. If consumer confidence is as strong a guide to economic trends as in the US, then it could be that China starts its recovery sooner.
The Daily Reckoning – Bringing in the quacks
BY BILL BONNER
Paris, France
Tuesday, 31 March 2009
We’re delighted to see Mr. Obama in action... rolling up his sleeves and taking direct action to straighten out the US auto business. In this world of collapsing asset values and depression, we needed a laugh.
Yes, dear reader.... we feel positively blessed... here at the Daily Reckoning. We are getting to see things we never thought we’d see – Crash, Depression, Socialism, Nationalizations... things that we’d read about in the history books. Things so preposterous, absurd and imbecilic that we never thought they’d be repeated... not in our lifetimes. We never imagined we see them in the 21st century... in the United States of America!
We used to laugh at foreign countries. They protected their auto industries... and paid fortunes for inferior cars. They pretended that their government hacks could do a better job of running an economy than hacks working for private industry. Their central banks printed money to try to boost domestic consumption. They meddled in markets. They fiddled their currency. Ha. Ha.
Other nations have taken over their car industries. That’s what led to that marvellous breakthrough in automotive technology – the Trabant – for example. You remember the Trabant? We don’t remember much about it. Except that it was a car so wonderful you had to wait many years to buy it. But this was in East Germany before the Wall fell. You had to wait many years to buy anything. And then, when the opportunity came... and the Wall came down... you could then buy a real car.
What did you do with Trabant? We don’t know, but we remember reading stories about people who just left them on the street with the keys in the ignition...
But why shouldn’t the feds be in the car business? It’s right in the US Constitution, isn’t it? The “Car Clause,” as Byron King calls it: every American will have the “right to life, liberty and a four-door sedan.” Heck, it’s in the preamble too: “When in the course of human events, it becomes necessary to take over the automobile industry...”
Besides, the feds are already in the insurance business – big time. The US government owns 80% of AIG. And we’ve seen what a great success they’re making of it. And they’ve been in the passenger train business for a long time too. Amtrak has a franchise on what should be one of the most lucrative traffic corridors in the world – from Boston to Washington, DC. Somehow, the company keeps losing money.
But now the feds are taking over autos too. Rick Wagoner was forced out of GM on Sunday so that Obama can put his own man behind the wheel.
Said Obama: “It is my hope that the steps I am announcing today will go a long way toward answering many of the questions people may have about the future of GM and Chrysler. But just in case there are still nagging doubts, let me say it as plainly as I can -- if you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warrantee will be safe. In fact, it will be safer than it's ever been. Because starting today, the United States government will stand behind your warrantee.”
How about that guarantee? Five years... Fifty thousands miles... or until the Feds run out of money – whichever comes first.
The stock market didn’t seem to care for it. Wagoner was probably an incompetent suit. His strategy wasn’t working and the company seems headed to bankruptcy. But so what? In a free market economy, companies have the right to go broke, don’t they? Then, their capital assets can be taken up by other businesses and put to better use. That’s the way it’s supposed to work. But now, everyone seems to have lost faith in the “market’s self-healing power.” So they’ve invited the quacks with their magic elixirs and miracle potions to have a try.
The Dow fell 254 points yesterday... the FTSE 100 fell 136… Oil fell below $50. And gold dropped $7.
Goldman Sachs has changed its tune on gold. Instead of going over $1,000 as it had previously forecast, it now says it expects the price to average $930 this year.
Homebuilder Lennar said it lost $155 million in the first quarter.
And thousands of demonstrators are preparing to give the G20 a piece of their minds…
Read on…
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