Natural Gas Is Going To Zero? Don’t Bet On It…

| July 27, 2012 | 0 Comments

No doubt about it, 2012 is turning out to be a year of extreme uncertainty in the natural gas market.  As you may know, the price of the abundant commodity sank earlier this year, thanks in part to weak US winter heating demand.

In fact, natural gas dropped to a 10-year low in April…

Of course, a warm winter wasn’t the only reason natural gas slipped into the gutter.  Advances in drilling technology have opened up enormous supplies of the clean burning fuel in the US.

As a matter of fact, supplies are so abundant that Energy Information Administration (EIA) natural gas inventories are at record highs for this time of year.  This abnormally high storage data is the primary reason prices fell so much this Spring.

And it’s also why some analysts suggest natural gas will become worthless later this year.

You heard that right- some analysts suggest natural gas is going to zero!

Now, before you call up your broker and tell him to short natural gas, take a look at this chart of US natural gas rigs in operation…

As you can see, the number of energy producers drilling for natural gas is falling off a cliff.  In fact, the most recent dry-gas drill rig count came in at 518… a 13-year low!

Now take a look at this…

Chart courtesy of Reuters.
See the orange line in the chart above?

That’s the natural gas inventory trend for 2012.  As you can see, this year’s inventories are well above the five-year average range (grey shaded area).  It’s a clear sign of oversupply in the market.

But look closer and you’ll see something very interesting…

Natural gas inventories aren’t rising nearly as quickly as they were in 2011 (blue line).  In fact, the orange line is on the verge of breaking back into the five-year average inventory range.

What’s going on?

In a nutshell, the quantity of natural gas going into US storage facilities is dwindling… quickly.  According to EIA inventory data, recent storage additions are nearly 60% lower than the five-year average accretion for this time of year.

These weak numbers are primarily due to the severe drop in natural gas drilling activity pointed out in the second chart above.  Generally speaking, production lags drilling activity by about six to nine months.  And the big rig count reduction that started in October 2011 is just starting to hit the market.

If this trend continues, we could see US inventory levels at the bottom of the five-year range by the end of the year.

That’s why some energy analysts are jumping on the bullish bandwagon…

In fact, one analyst suggests natural gas will unexpectedly surge.  That’s right, energy analyst Richard Finger suggested in a recent Forbes article that natural gas could explode to $8 by this winter!

He claims weak drilling activity, collapsing storage additions, and faster than expected production declines from existing gas fields will leave the US drastically shorthanded come January.

Can natural gas really surge that high in such a short amount of time?

While I agree with Mr. Finger’s thesis, $8 natural gas by this winter may be a bit of a lofty goal.  However, even if his analysis is only partially correct, natural gas could easily approach the $5-$6 range by year-end.

Of course, I’ve been pointing out this same bullish thesis since April 2012, back when natural gas was trading under $2.

Look at where it trades now…

As you can see, natural gas staged quite a rally over the past few months.  As a matter of fact, it’s currently trading at $3.10… up 63% from the April 20th low. Clearly, there’s not quite as much natural gas sitting around as many analysts will lead you to believe.

Bottom line…

Structural changes to the oversupplied natural gas market are slowly working their way through the system.  And that means we may see a bigger rally than many energy analysts expect in coming months.

If you’d like to participate in this potential rally, the US Natural Gas Fund (UNG) is an ETF that tracks the price of natural gas.  You may want to take a look at it for your portfolio!

***Editor’s Note***  We just released a new stock pick in our Penny Speculator newsletter.  To get the name of this stock that’s trading for less than a buck a share, click here.

Until Next Time,

Justin Bennett

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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