Everyone likes a good comeback story where large obstacles are overcome on the way to a favourable outcome.
And we’re about to see one in the investment world…
The shale gas boom seemed to be a disaster for the natural gas industry as the price of natural gas plummeted over a five-tear period to reach a multi-year low below $2 per million BTU in April 2012.
But as Money Morning Global Energy Strategist Dr. Kent Moors forecast, natural gas prices have rebounded with a vengeance since then. The price has more doubled (trading at about $3.80 now) since that bottom last spring, becoming this year’s top performing commodity. Nat gas hit a 20-month high of $4.43 per million BTU in April.
That trend of steady to rising prices is likely to continue thanks to increasing demand.
These factors, often pointed out by Moors, include the switchover by utilities from coal-fired power to gas-fired power, the start of exports soon of liquefied natural gas, and increased demand from industries such as the chemical industry.
And the trend is huge news for natural gas stocks, and their investors – especially when you look at what happened nearly 10 years ago…
Natural Gas Stocks in 2013
First, let’s look at what has happened to natural gas stocks this year.
Logic would dictate that the last year or so has been a great time to be invested into natural gas stocks.
In the past few years, many natural gas companies have reduced their costs while keeping production in check in order to stay viable in a tough market environment.
This has put a good number of them in a position of strength to benefit from the higher natural gas prices we’ve seen in 2013.
The companies that are poised to benefit the most are those with the lowest cost of production and that are leveraged to the price of natural gas.
Robert Mark, oil and gas analyst for Canadian firm MacDougall, MacDougall & MacTier, told the Globe & Mail ’Companies that have been producing profits over the past two years [when selling prices have been low] have proven their worth and are attractive investments.‘
But the market is rarely logical. Despite the most sustained upward move in natural gas prices in over 10 years, the shares of most gas companies have yet to embark on a sustained move upward.
The Market Rhymes
But we’ve seen this movie before. . .
As Mark Twain said, ‘History doesn’t repeat itself, but it does rhyme.‘
In this specific case, the ‘rhyme’ goes back to 2001-2002.
At that time, natural gas prices also tanked to below $2 per million BTU. Then over the next several years, prices more than doubled to over $4. Just as it has now, with the difference being the current rebound happened in a shorter time frame.
Yet, as now, the stocks of natural gas companies just sat there.
But eventually these stocks did move higher…and in a big way.
Over the next two years, natural gas companies soared in excess of 200%, a true comeback story!
In effect, sooner or later, the stocks of natural gas firms have to follow prices higher.
That should apply in the current market environment as well.
Contributing Editor, Money Morning
This article first appeared in the US Money Morning on 27 June, 2013
From the Archives…
Why Your Financial Advisor Won’t Like This Investment Advice…
28-06-2013 – Kris Sayce
Is This Your Last Chance to Sell Before the Stock Market Sinks?
27-06-2013 – Murray Dawes
Is This the Ultimate Contrarian Opportunity…Or a Death Wish?
26-06-2013 – Dr Alex Cowie
How Central Bank Zombies Control the Stock Market
25-06-2013 – Dr Alex Cowie
Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…
24-06-2013 – Kris Sayce