One really has to look hard for a bullish gas story these days, but with a lot of amateurs in the market poring over the charts, or is that tea leaves, some still hope.
The discussion here is about North American gas, but with Henry Hub setting the price for LNG imports to the UK, we've got to take all opinion on board. Even when it's wrong as in this article from Canada's National Post,which asks Natural Gas Time to Buy?
With all the supply side issues, why would I be bullish on Natural gas? Well there are a few reasons - read on:
i) The economy is picking up: Demand is showing signs of life and the manufacturing sector is demonstrating its first signs of growth. One can expect gas demands from gas-fired power plants to rise accordingly.
Demand is falling and falling permanently. Just today we see that US Steel demand, closely allied to the automotive sector is down 33% this year, and the UK is no different. National Grid Transco sees flat or declining demand for the next 20 years in it's long term outlooks. Demand does not bounce back by double digits, especially when the recovery,if it even exists, will be a jobless one.
ii) The oil to gas price ratio: Eventually, I do believe that the relation between the price of oil and gas will resurrect. The recent spike in the oil to gas price ratio to 25x will likely return back to normal in the long run. With the economy picking up and oil futures pointing upwards, one can expect that the gap in this ratio will close.
The oil/gas link is permanently broken with the gas glut from shale, LNG and permanent structural demand drops. Looking at the past is not a way to predict this future, since the present is undergoing a transformational paradigm shift.
iii) The weather: We are heading into Q4 which means that winter is approaching! Gas demand typically picks up in the winter months and gas prices historically have done well during this time of the year. Further, as we are at the height of the hurricane season it is quite feasible to see a gulf-based storm emerge in the coming weeks creating a short term supply shortage, allowing inventories to come down.
Apart from which hurricane season is that, it being the quietest in years and only has 6 weeks to run, hoping for a cold winter to raise gas prices sounds as desperate as it is cynical. And markets always factor in risk of cold weather: that's why January is 37.20 and October is 22 odd today. On this day last year we saw the same spreads for winter. When the coldest winter in 18 years met another Ukrainian fiasco, January 2009 gas still ended up 50% lower day ahead prices than September forwards. And it happens almost ever year like clockwork.
iv) Environmental policy: The Obama administration is pushing ahead with climate change initiatives that will cut green house gas emissions over the coming decades. Although the plan is not centred on gas-fired energy production at the moment, there is almost no feasible alternative to the power plan that would allow the U.S. to reach its targets in its given timeframes. Most of the power in the U.S. is generated from coal-powered power plants which are a key contributor to the green house gas problem. Getting off of coal and onto emision friendlier power substitutes like wind, solar, and nuclear is a long term project which will likely require a mid-term solution. Gas-fired plants do produce green house gases but much less than their coal-fired counterparts - it would be much quicker and cheaper to substitute coal-fired plants for gas powered ones. This would allow for an interim step in achieving the green house gas emissions reduction time frames.
Just as big a fear in the UK, just as unlikely. Facts, as opposed to anecdote are that environmental costs are small portion of the total bill. Sure those costs will go up by 7%, but that's 7% of less than 10% of the final price - not very much. Environmental costs have minimal impact on the actual commodity price or demand short term, and especially so this winter.
v) Demand from Emerging Economies: It's a known fact that India and China are consuming more oil, but they are also consuming more natural gas. With gas liquefying techniques improving, the transportation of natural gas across our oceans, as is done with oil, is likely to become more feasible in the future. More accessible gas transportation = more demand from emerging economies = increased prices.
The bull's favourite reason. Which part of gas glut doesn't he believe? There is so much gas in the US that it pushes down world prices, i.e ours. And there is so much LNG available from new sources that Asian prices have never been lower. Finally, we have said from day one here, China is using more gas, but the rate of growth is slowing and world supply will reflect this new balance between supply and demand. China as smog ridden energy hog is a peak oil story, not reality.
vi) Have an opposing view to the market: One of my key takeaways from my Ivey MBA, specifically from sitting in Steven Forester's Portfolio Management class, is that you are more likely to drive above normal returns by formulating views that oppose the overall market view. The majority of the market believes that the natural gas market faces long term supply issues that will suppress prices for years to come - I oppose this view and think that gas prices are a great play over the next 24 months.
We have an MBA from the University of Hard Knocks Upside Your Head. Which naturally makes us agree that the contrary view should be respected and expected. If we could accurately predict the outcome of numbers as random as gas prices, we'd invest in Lotto tickets. A contrary view should always be respected. But not listened to on principle alone.