Big Mike's Contrarian Investing Blog

Ernesto, you disappoint me

Heading for Florida instead of the oil and gas rich Gulf of Mexico. Oil and gas prices have taken a dive. How disappointing.

The case for natural gas

Big Mike is back!

This week I’ve been thinking about natural gas. Two factors are probably scaring away a lot of investors from natural gas stocks: (1) record high storage; and (2) the XNG (AMEX Natural Gas Index) is only slightly off its all time high price.

The record high storage masks the coming natural gas crisis. Production of natural gas has actually been declining, and the hurricanes from last year permanently took some natural gas production off line. However last winter was ridiculously warm, and the high domestic gas prices have caused demand destruction; natural gas intensive industries have moved to other countries with lower gas prices, never to return. Because of the warm winter and the demand destruction, it looks like the U.S. is well supplied with natural gas, but it’s really not.

But the sign of the coming gas shortage can be seen in the storage withdrawals of this summer. This is the first time there has ever been a draw from storage during the summer. The increasing reliance on natural gas-fired electric plants has finally revealed itself in the storage reports.

The increasing U.S. population means that the square footage of buildings that need to be heated in the winter (as well as cooled in the summer) will also be increasing.

Where will the new production come from to meet future demand? Look at the U.S. E.I.A. production data and you will see that production has been nearly flat since 1996 despite rising prices.

Increasing demand with no corresponding increase in production guarantees higher natural gas prices in the future. Another bad hurricane season or a cold winter would result in a very quick return on investments in natural gas companies.