It's how the commodity world works. Booms and busts. Right now, one commodity is going through a "mini-bust."
The price of it has fallen 75% in the past few months. A slew of reports about declining near-term demand and rising stockpiles have sent the price of it down even lower. Near-term prospects are grim, but it's looking like a buy.
I'm talking about natural gas.
There's no denying natural gas has fallen out of favor. The bearish sentiment has only gotten stronger in the past few days. Traders who were holding out for a recovery are quickly throwing in the towel as prices continue to fall.
As with most out of favor, beaten down commodities, every time the price of natural gas drops, I get even more interested. Here are five reasons why I've slowly started to buy natural gas.
- Near-Term Outlook is Bleak - Most investors fail to look beyond this next week - even though, in most cases, their time horizon is much longer. They're doing it again in natural gas right now.
- Supply is Getting Cut - As we've seen in every commodity cycle for the past 100 years, low supplies eventually lead to higher prices.
- Oil to Natural Gas Ratio - History shows, when oil prices rise, natural gas prices follow (in broad terms - there is very little relationship in the week-to-week volatility of oil and natural gas prices).
- Inflation - Of course, there will be consequences. One of those will be that the nominal price (the price tag price) of real assets will go up.
- Cap and Trade - Natural gas will be a clear benefactor of the cap and trade legislation because it is produces significantly less carbon than coal, America's leading source of electricity.