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

Senate Introduces Natural Gas Act, Boone Pickens Cheers

In case anyone is unclear as to how Washington works, read this press release from July 8th concerning the newly introduced Natural Gas Act. The proposed Act would offer a generous tax credit of (up to) $12,500 for the purchaser of a light-duty, natural gas powered vehicle. For comparison's sake, the proposed credit is over 50% more valuable than the current tax credit offered to first time home buyers, and over 6X more valuable than The Lifetime Learning Credit (unless you are a student in a Midwest disaster area, in which case the credit is only a third less valuable). Additional components of the legislation - introduced by Senator Robert Menendez (D-NJ) and co-sponsored by Senators Orrin Hatch (R-UT) and Harry Reid (D-NV) - are below:

• Allows 100% of the cost of a natural gas vehicle manufacturing facility that is placed in service before January 1, 2015 to be expensed and to be treated as a deduction in the taxable year in which the facility was placed in service. This decreases to 50% after December 31, 2014 and is phased out by January 1, 2020
• Allows state and local governmental entities to issue tax exempt bonds in order to finance natural gas vehicle projects
• Increases the refueling property tax credit from $50,000 to $100,000 per station

We were also interested to read T. Boone Picken's name in the press release, where he was referred to as an "energy-independence advocate". Of course, Mr. Pickens is a strong proponent of ending our "addiction" to foreign oil. Presumably though, he would prefer that we replace oil with an energy source that he is heavily invested in - say Natural Gas.

Ultimately, we are better off consuming a resource which is found in abundance in the United States. Furthermore, Natural Gas is supposedly "cleaner" than oil, providing Democrats with the political cover to get behind any legislation that promotes use of the flammable gas. Perhaps this is why investors have stampeded into the Natural Gas ETF (UNG), challenging the fund's ability to keep pace with demand for new shares. From a political standpoint, Natural Gas looks attractive; however as contrarians, we are a bit skeptical of any product as "hot" as UNG.

*no position in UNG

Sphere: Related Content