by winston » Tue Oct 27, 2009 7:13 am
How to profit from the new natural gas cycle
From Casey's Daily Dispatch:
So much [natural] gas is now available in North America, in fact, that we are self-sufficient for the next 100 and probably even 200 years.
This, of course, changes the entire dynamic for gas - for one thing, blowing up the traditional oil-gas ratio that has historically been used to gauge relative valuations. Oil, as a global market, is now driven by an entirely different set of factors, including those that are geopolitical in nature.
In the new world of virtually unlimited North American gas, few inputs now matter more than price alone. To use the old adage in commodities circles, “The cure for low prices is low prices, and the cure for high prices is high prices.â€
Translated, when natural gas prices fall to a level at or below production costs, producers will begin shutting in capacity until the point where prices begin to rise again. And once prices reach a certain price, the producers will open the pipes to the point where excess supply pushes prices back down again.
This simple reality means that we can expect North American gas prices to trade in a fairly predictable range from this point forward, bouncing off the cost of production and the price at which producers overproduce.
With natural gas prices having risen from last month’s low of $2.92 per Mcf, to over $5.00 recently, I polled our energy team on how much higher prices might go before bouncing off the new ceiling.
Marin Katusa and Dr. Bustin, who head up our Energy Research team, share the same view that the upside of the range is in the area of $5.50, the level at which many North American gas producers are hedging their production. Those companies, points out Dr. Bustin, do a lot of research on predicting gas prices, and so if they hedge at $5.50, it’s because they think gas prices will remain below that level.
The bottom of the range? Marin puts it near last month’s low, which I’ll round off at $3.00. Dr. Bustin and Dave Hightower, editor of Casey’s Trend Trader, put the lower end of the range higher, from $3.22 to $4.50, but don’t see that range as fixed in stone.
Hightower is more optimistic on the upside, seeing the potential for natural gas topping $6.50, a price at which producers will be willing to expand production, but feels it could go considerably higher than that, should oil prices break over $90 and the Obama administration react by offering incentives to boost domestic consumption of natural gas over oil.
Regardless of the exact limits of the natural gas price range, simply being aware of the changed fundamentals of these markets opens the potential for some serious profit making. Whether it is by buying the shares of natural gas companies when they align with prices at the low end of the range, and selling when they approach highs… or utilizing carefully structured futures and options to play the market -- natural gas has the potential to offer attentive investors a gift that keeps on giving.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
.(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).
..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................
