Are Natural Gas Stocks Finally in Play?

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Is it time to buy while nobody's looking?

Is it time to buy while nobody's looking?

While most of the media focus is on BP and the latest offshore spill, this might be our chance to pick up natural gas.

Sure, we all have predictions about the inevitable transition from oil to natural gas. It makes sense, doesn't it? After all, the U.S. is a natural gas powerhouse.

Thanks to the rise in unconventional shale deposits during the last few years, the U.S. finally overtook Russia as the world's largest gas producer—and that's to be expected after our shale gas production jumped 71% between 2007 and 2008.

During my rant on the supermajors last week, one quick-minded reader asked whether or not big oil's move into shale gas has changed my outlook on their future performance.

The short answer: No, not in the slightest.

Having said that, I think it is time for us to revisit some old natural gas plays.

Is it time to buy natural gas?

You know the story. . .

Since the summer of 2008, the supply/demand balance has been out of whack.

As you can see below, we've been riding the top end of the 5-year storage levels for more than a year:

natural gas storage

Last week, U.S. working gas storage was 2,357 Bcf—an 88 Bcf increase over the previous week. In case you're counting, that's 1.6% higher over the week before and 14.9% above last year's level.

As my colleague Ian Cooper has told me time and again, "Right now, natural gas is the ultimate contrarian bet."

After watching prices and demand take a beating for the last 24 consecutive months, it's difficult to disagree.

So why is it time to buy?

Simply put, things are beginning to turn around. And right now is a perfect time to strike.

Take a minute and look at this chart from the EIA:

natural gas consumption

Slowly but surely, our consumption is on the rise again. Also, don't forget that June is seasonally when our natural gas demand is at its lowest. In other words, prices should be lower.

According to the EIA, approximately 50% of our demand is used by the residential and industrial sectors.

I've been telling you to wait for more good news about a demand recovery, and this month could be our sign.

Manufacturing in the U.S. has expanded for the 10th straight month. According to a labor department report, factories across the U.S. added about 101,000 to their payroll during the first quarter of 2010.

Although natural gas prices are still trading under $5/Mcf, the last rally has given us some hope:

natural gas prices

It may not be the run to $16/Mcf that Pickens has been praying for, but I can think of one investment happy to finally see a turn for the better. . .

Is UNG finally out of the trenches?

Before getting into the drillers, the one natural gas play that is looking stronger is United States Natural Gas Fund.

I'll be the first to admit being hesitant on buying UNG. Their 2-year chart looks like it came from some gruesome horror story.*

*Warning: If you bought shares of UNG back in 2008, I suggest averting your eyes.

ung chart

The question on our minds lately is if UNG has finally bottomed.

The more I see signs of recovery in the industrial sector, the more I like their chances. Don't be surprised to see a the supply-demand picture start to brighten next year. . . And if that's the case, we'll easily see natural gas prices rebound.

Until next time,

Keith Kohl
Editor, Energy and Capital

P.S. When it comes to natural gas, most investors I know have cold feet. If nothing else, that fact makes me even more confident. . .

I've seen what kind of losses the herd is willing to take. And while they panic-sell their hard-earned money away, my readers and I are there to pick apart the profits. It's also the reason we've closed 27 straight winners—and now we're at it again. This time, it's a North American oil secret that's getting a new breath of life. I've highlighted all the details in this free report, including several new picks that could make you 1239% by 2012.

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