Themes: Natural Gas, Oil, UK Shares, Energy
Natural gas isn’t a sexy investment. It never has been. It is usually seen as the poor, dull cousin in the oil and gas industry.
But that’s about to change. Natural gas looks set to give investors the biggest gains in the energy industry over the next 12 months.
Let me show you why. And let me show you a simple way to profit from it.
The energy of the future
Gas is the energy source of the future. It is cheaper than oil. It is cleaner. And it is vastly more abundant. The International Energy Agency says demand for gas over the next two decades will grow almost twice as fast as demand for oil – 1.8% per year versus 1% for oil.
Natural gas now supplies 20% of the global power industry. That’s expected to rise to 30% over the next two decades. And there is growing demand for it as a motor-fuel as well.
Natural gas is a cost-effective substitute for oil. So its price tends to track the price of crude oil. But as you can see in the graph below, the price of crude oil and natural gas started heading in opposite directions from about May this year.
Graph 1: UK gas price versus oil price
Source: Citigroup
That opens-up a chance for you to snatch a profit. Because the price of gas has been driven down by short-term factors. The US gas price hit a peak of $13.31 last year. As you would expect, gas producers rushed to raise output. Drilling activity for natural gas hit an all-time high last year. But that happened as the global economy plunged into recession. Demand for gas has tanked leading to a massive global glut. Prices crashed.
One of the key problems weighing down the gas price is the lack of storage space. The US is the world’s biggest gas market. And it has storage space for about 4 trillion cubic feet of gas. That space is filling-up fast. At the start of May, the US had just about 1.9 trillion cubic feet in storage. By last Friday, that had surged to 3.3 trillion cubic feet.
If the US runs out of storage space, the price of gas is going to collapse. When that happened in the UK in 2006, producers were actually paying buyers to take the gas off their hands. Fears of that happening again have sent gas price plunging by 83% from its peak last November. Gas is now trading at a seven-year low.
But these low prices just can’t last. And that’s where the chance for you to make a quick profit comes in.
Here’s why gas is set for a rebound
Take a look at our next graph below. You can see that for most of the last two decades, the ratio between crude oil and natural gas prices was somewhere between 5 and 12. The ratio between has now reached a record above 25. For it to come back to anything close to the historical range, the price of gas is going to have to rise very sharply or the price of oil will have to fall substantially. We will probably see both happen with most of the upside coming from a spike in the gas price.
Graph 2: WTI oil prices divided by NYMEX natural gas prices
Source: Bespoke Investments
Demand for oil tends to peak in the summer. Demand for natural gas tends to spike in winter though. The heating season really begins in October. It won’t be long before the global natural gas glut turns into a deficit and prices start to take-off. I expect to see a sharp pick-up in the price of natural gas towards the end of the year. This is a good time to position yourself for the rebound.
Here’s the smarter way to play it
The easy ‘pure play’ on natural gas, as with any general commodity, is via an exchange traded fund or ETF. The ETF Securities Natural Gas fund (Ticker symbol: NGAS), for example, allows you to track the price of natural gas futures traded in New York.
But there’s a smarter way. Listed on the London International market, Russia’s national gas company, Gazprom (OGZD: LI), is a good proxy for natural gas. It controls almost a fifth of the world’s gas reserves and production.
Gazprom rewarded investors who got in early phenomenally well. The price of its London-listed GDRs rose from just $2.20 to $62.50 each between May 2000 and May 2008. That was a whopping gain of 2741%. They have since lost about 70% of their value and trade at $19 each. With a bit of patience though, they could repeat their previous stellar performance.
If you’re looking for a way to play this theme, Gazprom is worth a look. It gives you the chance to ride the rebound in the gas price while minimising the short-term downside from the gas glut.
Good investing,
Manraaj Singh
For The Right Side
Editor’s note: Manraaj Singh is Chief Investment Strategist for Profit Hunter. Manraaj advises a small group of investors on special situations and emerging markets opportunities. To access his latest report and also put yourself in line to receive his next recommendation, click here.
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