If ever there was a market that should be all the rage with investors, it’s this one.
It’s a market that boasts abundant, cheap supplies in the United States and should be a slam dunk as America’s fuel of choice.
But it isn’t. At least not yet, anyway.
I’m talking about natural gas.
Beaten down and unloved, with prices stubbornly bumbling along below the $6 level for almost a year now, you’d be forgiven for thinking that you can’t make money from the natural gas industry.
[ad#Google Adsense]But that’s not true, because many natural gas companies have made money regardless, either due to their production costs being lower than market prices or through hedging at higher prices.
There is a way to make money from natural gas… if you know where to look…
The Slow Shift Towards Natural Gas
While much is made of the plentiful U.S. natural gas supply, this isn’t the main obstacle in the way of higher prices.
There are two more significant reasons for a lack of penetration and wider usage of the fuel:
- Not enough use in the transportation sector.
- The oil lobby.
You see, in order to use natural gas for high-demand applications like transportation, there has to be both the infrastructure and wide-scale vehicle modification in place.
Both of those are happening faster than a few years ago… but still too slowly.
Much of the onus for implementing the shift towards natural gas falls on the government. But rather than promoting the heck out of natural gas – as it should be doing – it faces a bigger obstacle in the shape of the major oil companies.
It’s not that they want to see natural gas fail. On the contrary, in fact. But they just don’t want it to succeed until they’ve established bigger positions within the natural gas industry – and will do all they can to sway political opinion in their favor until they do.
But they’re already making moves…
Big Oil Wants Big Money… And It’s Moving into Natural Gas to Get it
Recently, for example, Exxon Mobil (NYSE: XOM) forked out $41 billion to buy major natural gas producer, XTO Energy. In addition, Norway’s Statoil bought a huge chunk of natural gas properties from Chesapeake Energy (NYSE: CHK).
There are many other examples of this transfer of gas assets from gas companies to “Big Oil.” And at the end of the day, oil firms couldn’t care less whether they’re going to sell oil or natural gas… they’re in the game to make money either way.
But oil companies’ move into the natural gas market is important, as it will help the development of the infrastructure. And that’s critical, given the need to generate more power for a growing population.
Over the coming months and years, for example, we’ll see a greater adoption of natural gas for electricity generation. And while natural gas is by no means a clean fuel, it’s much cleaner than coal, which still fires hundreds of power plants.
In addition, the push towards electric cars directly benefits natural gas, whose usage will increase in order to generate that power. Infrastructure development is already rising, with states like California building filling stations in advance of the increased demand.
And in terms of price, you’d be hard-pressed to beat natural gas…
The Factors That Favor Natural Gas… And the Companies That Will Benefit
When it comes to finding lower-cost alternatives to natural gas, there are few candidates. Nuclear is essentially the only other viable option. There are several compelling reasons in favor of natural gas, too…
- As oil prices continue to climb, due to foreign demand and economic growth, eyes will once again turn to less expensive alternatives like natural gas, which has a much lower price point than oil.
- Less lobbying efforts from oil companies.
- Greater electricity demand, coupled with ample natural gas reserves and increased local production.
The bottom line is that natural gas will emerge as the “natural” alternative – and will be profitable for investors who take a longer-term view.
[ad#ChinaBlankCheck]Also, keep in mind that the market is still volatile and the threat of supply disruptions due to bad weather or other factors still exists.
The winners will likely be the major players in the industry, which boast low-cost production reserves – companies like the aforementioned Chesapeake Energy, plus EnCana (NYSE: ECA) and Devon Energy (NYSE: DVN).
So take advantage of the current lull in the price of natural gas to take positions in companies like these and use the push towards greater energy independence for your own financial independence.
Good investing,
— Karim Rahemtulla
[ad#jack p.s.]
Source: Investment U