Extremely bullish on natural gas
Despite the astronomical rise in the price of natural gas over the past year, I continue to be very bullish. Normally once winter is over, the demand for natural gas tapers off and we see a significant drop in its price. The fact that there are many E&P companies partially hedged at sub-seven dollar natural gas this quarter and next illustrates just how sudden and rapid the its price has been. I strongly believe that nat gas has a lot more room left to run. Natural gas is currently trading a 40% discount to oil, on an energy equivalent basis. Furthermore, it is trading at much higher prices in Europe. These higher European prices are causing LNG (liquefied natural gas) to be diverted away from the United States, causing additional upward pressure on prices here.
Natural gas has a lot of wind at its back in the form of increased usage for electricity generation, usage by ethanol plants, usage in the recovery of oil from Canada's oil sands, and the peak of the hurricane season rapidly approaching. I personally would not be surprised to see $15+ natural gas before the end of the year. This doesn’t even get into the potential passing of a carbon tax or cap and trade regulations by a soon to be all Democratic U.S. government down the road (nat gas has lower carbon emissions than coal).
Today the energy ministers from Qatar, Algeria and Iran issued similar bullish statements about nat gas. Iran's oil minister Gholamhossein Nozari stated "There is a natural relation between the price of oil and the price of gas. Because it is a clean fuel it will increase its role in the energy market and I think the price of gas will increase as well.'' (see article: Natural Gas to Converge With Oil Price, Exporters Say).
In the U.K natural gas is currently selling for 71.35 pence a therm, which is the equivalent of $85 oil. This compares with $141 Brent crude. British natural gas has risen only 38% this year, compared to the 50%+ rise in the price of oil.
Not only has the price of natural gas lagged the price of oil, but demand for it is rising faster than demand for oil. According to statistics published by BP, global natural gas usage increased 3.1% in 2007, compared with an increase of only 1.1% for global oil usage.
I am long a number of E&P companies with significant natural gas exposure, including Apache (APA), XTO, Devon (DVN), and Penn West (PWE) to name a few. The market is not giving these companies nearly enough credit for the expensive natural gas that we are currently experiencing and will likely continue to see in the foreseeable future.