Is Natural Gas a Long-Term Investment?


". . .based on a DOE report released in March, 2009 will see the largest surplus of gas supply in recent years. . . "

According to the Energy Information Administration, energy from natural gas accounts for 24% of total energy consumed in the United States, second only to oil, which accounts for 40%. Coal accounts for 23%.

There are many applications for natural gas and new uses are being discovered all the time, such as in transportation sector. The industrial sector accounts for the greatest proportion of natural gas use in the U.S., followed by the residential sector.

The government's Annual Energy Outlook 2009 report shows that the monthly average Henry Hub natural gas spot price is expected to stay under $4 per thousand cubic feet (Mcf) until late in the year as abundant natural gas supplies converge with weak demand driven by an 8% decline in industrial sector consumption. The price is projected to increase from an average of $4.13 per Mcf in 2009 to $5.49 per Mcf in 2010 as expected economic growth boosts industrial consumption of natural gas.

With today's oil price at $70.5 and natural gas at $4.15, the ratio is over 16:1. It is unlikely for the prices of oil and gas to be out of sync too long.

However, based on a DOE report released in March, 2009 will see the largest surplus of gas supply in recent years—projected at 23.72 trillion cubic feet; consumption will be 23.14 TCF. The projected price will be basically flat for the next 7 years. Not until 2016 will the price of gas return to 2006/2007 levels.

As oil reserves declined and price skyrocketed, coal—one of the world's most plentiful energy sources—has become a popular global commodity. The U.S. has the largest coal reserves in the world. According to Christine MacDonald, author of Green Inc, global coal consumption has seen double-digit growth in recent years, far outpacing any other source of energy. It predicts coal usage will double by 2030. Market Vectors Coal ETF (KOL) is the largest pure coal ETF.

Coal already provides nearly two-thirds of U.S. electricity. Even though coal contributes 39% of the world's carbon dioxide emission, if gas prices are too high, coal might easily take over the electricity power currently generated by gas.

For me, natural gas is a short-term bet and not a long-term investment.

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