Natural Gas Price

Last autumn, when natural gas fell below $3.00 mcf, I posted that it my might be worth more
work to get up to speed on it. There was a rally, but I did little in the way of follow-up. Since
the autumn rally, gas has fallen into another bearish funk. I still think gas is interesting, as it
is now trading just above $4.00, which is a pennies premium over all-in production costs.

Natural gas was in a powerful bull market over much of the first half of this decade, as solid
fundamentals allowed it to piggy back on the strong upswing in the oil price. With hurricanes
Katrina and Rita hitting the La. - Tx  gas hubs in 2005, gas surged to a crazy $14.+ momentum
driven peak in 2005. It made a secondary top of around $13.60 in the commodities blow off
of 2008 before crashing down to $2.90 during Sep. 2009.

Natural gas demand was on the flat side over the past decade, while production rose about
10%. With a rising price trend, exploration increased and proven reserves surged 67% and
is closing in on the old record set years ago. The 2007-09 recession punished demand as new
supplies came on, leading to a large 12% increase in carry stock or stored supply. With this
new and upward trending inventory overhang, the price has remained suppressed over the
past two years. The adjustment process has been extended because shutting in gas wells
is a costly, time consuming and tedious process.

With an economy that is continuing to recover and normal weather, consumption should
rise and the inventory overhang should dissipate over the next two to three years, although
inventory will remain near  historically high levels.

With gas having a strong reserve position and with new technologies at work to produce
greater supply such as shale gas, there is no explosive pricing story here. But, smart
companies like Exxon are bypassing oil properties to develop gas reserves, and that also
means the industry will be pressing to find ways to boost gas consumption through fluids
conversion and other technologies. Gas is cheap relative to oil, but the key here is to find
practical ways to boost its utility.

Gas players who have bought contracts around $4.00 over the past decade have had the
opportunity to profit each time out. Holding gas above $8.00 mcf has not worked out well
save for the Katrina and commodities price spikes of 2005 and 2008, respectively.

Continuing economic recovery and better inventory control would support a central $4.00 -
$8.00 range over the next couple of years. Moreover, if smart guys like Exxon want to own
more gas, it may be worth thinking about.

Ahead, I want to look at UNG, the direct ETF type participation in gas.

$NATGAS chart.