Warren Buffet: Natural Gas Bull!
Old Man Winter sure is being indecisive. A few months ago it looked as though the cranky old curmudgeon would take another winter off, just as he did in 2011/12. Unseasonably warm temperatures graced many parts of the US in December and January.
But as people in the Midwestern and Eastern US can now attest, winter is back with a vengeance. Multiple blizzards and cold spells have worked their way across the US over the past few weeks.
And one thing’s for certain, Old Man Winter’s newfound enthusiasm has heating demand back on the upswing…
As you may know, 50% of US homes rely on natural gas for heat. And yesterday’s EIA natural gas storage report revealed consumers are really cranking up the thermostat.
In fact, natural gas inventories dropped by 146 billion cubic feet (bcf) for the week of March 1st. That’s a bigger than expected weekly withdrawal and puts total US inventories at 2,083 bcf. For those of you that watch the natural gas market closely, you realize storage levels are now 15% below last year… a good sign for bulls in the near-term.
However, bullish enthusiasm should be kept in check as natural gas inventories are still 269 bcf (about 14.8%) higher than the 5-year average. With warmer temperatures drawing near, bulls may be hard pressed to keep the recent natural gas rally intact.
However, investors should remain optimistic of higher prices in the long run…
From a longer-term perspective, energy market fundamentals are finally turning in favor of natural gas. As you’re likely aware, the commodity fell to decade lows in early 2012 as abundant supply overwhelmed the market.
But as you may also be aware, dry gas drilling has slowed dramatically since then. In fact, last week’s Baker Hughes (BHI) rig count revealed 420 operators drilling for gas. That’s close to a 14 year low!
And here’s where the bullish case really starts to build…
US industry is coming up with new ways to capitalize off cheap natural gas, thus increasing demand.
One of those ways is through exporting gas overseas. In fact, the Federal Energy Regulatory Committee and the Department of Energy has already granted Cheniere Energy (LNG) permission to export liquefied natural gas (LNG). Cheniere will ship LNG to overseas markets via their Sabine Pass, Louisiana facility once it’s operational in 2015.
Of course, other companies are applying for the same export permits. Should they get them, exports will create a huge new demand aspect the natural gas market has yet to factor in.
And that’s not all…
Bulls got another dose of good news this week when rail company BNSF, announced they’re testing natural gas engines in locomotives. As you may know, Warren Buffet’s Berkshire Hathaway owns BNSF, the largest railroad operator in the US. BNSF estimates it is the second largest consumer of diesel fuel in the US, behind the US Navy.
If successful, the switch from diesel-powered locomotives to cleaner burning natural gas will be another form of new demand.
Bottom line…
While we may see a bit of weakness in natural gas pricing as warmer temperatures arrive this Spring, the long-term picture for this commodity is still wildly
bullish. One way to invest in the eventual price resurgence is through low-cost producers.
With finding and development costs below $2 per Mcfe, Southwestern Energy (SWN) and Ultra Petroleum (UPL) are two promising long-term buys.
Until Next Time,
Justin Bennett
Category: Commodities
