Assessing Natural Gas as an Investment

Natural Gas, an abundant yet integral component of US energy supply, has today reached a price of $2.52 per million British Thermal Units - a level not seen since 2002. I'm always intrigued when the price of an asset reaches a multi-year low (unless of course that "asset" is the common stock of Fannie Mae), especially when the asset is a commodity that is used for daily and essential functions such as heating homes and cooking food.

The catalyst for today's drop in natural gas prices, according to most media outlets, was the Energy Information Administration's report which showed a 17% year over year rise in the nation's underground gas inventories. As evidenced by the chart below however, there isn't a definitive relationship between the price of natural gas (as measured by the United States Natural Gas Fund) and the total volume of gas in underground storage.
While UNG may not be the most accurate measure of spot natural gas prices - the fund trades at a ~10% premium to it's net asset value - it's certainly reliable enough to illustrate the point. Additional concerns abound regarding the contango that's developed in the natural gas futures market; that is, near month contracts are trading at a steep discount relative to those further in the future. From my perspective, this is a concern that should only apply to individuals who are establishing short term trading positions. In other words, if you can stand to watch your brokerage account balance fluctuate over the next several months, it may be wise to base your investment decision on the potential future demand for natural gas.

I am of the opinion that, while the private sector fuels the lions share of economic growth in this country, large structural changes are most often effectuated via the federal government. Within the broad context of energy sources, this dynamic can be observed in the recent revival of nuclear power - an area where the US lags far behind many European countries. Similarly, legislation recently introduced in the Senate has the potential to spur investment in natural gas technology, specifically in areas beyond NG's traditional scope of use. S.1643 would provide a $3500 tax credit for homeowners who convert their heating system from an oil, to a natural gas based system. S.1350 proposes to substantially increase tax credits for the purchase of a vehicle fueled by natural gas, as well as expand the credits available to anyone who builds a natural gas fueling station. There are other similar bills in the House of Representatives whose objectives are essentially the same. The bottom line is that Congress has identified natural gas as a cleaner, viable alternative to crude oil. Clearly, the switch won't be made overnight, but I suspect that natural gas will eventually overtake crude oil as our nation's primary energy source.

*no position in UNG Sphere: Related Content