One of the main things I look for in an investment theme is longevity. I've written many bearish articles about gold based upon the single thesis that fear and panic are temporary. The key isn't to buy into the panic created price spike, instead, investors should be looking to exist their positions. I usually look at the headlines, see what is moving and then make a judgment whether or not the move is temporary and likely to be reversed, or is it a transitional/transformative event that will materially alter the prospects going forward. Right now I have my eye on the biodiesel industry. The biodiesel industry is in a holding pattern awaiting the outcome of the EPA's decision on its 2014 biodiesel quota or "RVO," and the decision by the US Congress on the fate of the "blenders' tax credit" or "BTC." A favorable outcome in either of those two issue will fundamentally alter the biodiesel industry's profit outlook, at least for 2014.
The non-investable idea that has been hitting the headlines recently is the price of natural gas. Natural gas recently broke $5.00/mmbtu. The "Henry Hub" spot price is just under $5.00/mmbtu.
That is up from a recent low of less than $3.50 set just a few months ago. A $1.50/$3.50 = 42% gain in 3 months should give anyone pause. What caught my attention most about this recent strong performance was that it is associated with the abnormally cold winter. Having lived through the winter of 1979 and the 1970s coming ice age scare, I am understandably skeptical of the longevity of a record cold winter being caused by global warming gases like CO2. Cold winters are temporary. Already, local forecasts are for 40 degree temperatures this weekend, up from sub-zero just last week. Headlines like Atlanta getting stranded in snow are likely to represent a peak in fear and demand for natural gas, and represent a far better time to sell than buy.
The transitional weather isn't the only reason, however there are more fundamental reasons as well. Part of the increase in natural gas prices is due to restricted supply. Low natural gas prices have resulted in many wells being shut-in. Producing wells have dropped from a peak near 1,600 to less than 400 today according to the EIA.
That huge reduction in wells however hasn't slowed production. Believe it or not, natural gas production is actually reaching record highs.
(click to enlarge)
This is largely due to the surging productivity as a result of technological advancements and recently discovered fields.
Last time natural gas traded around $5.00/mmbtu was back in early 2011 when the rig count was over double where it is today. Back then they were shutting in wells as prices fell. This time I would expect just the opposite, with wells being brought back into production as prices return many to profitability.
(click to enlarge)
Early signs of that happening already exist.
Baker Hughes (BHI), an oilfield services company, reported that rigs targeting natural gas rose slightly last week, to 374 from 372 for the week ending December 13....On Baker Hughes's (BHI) 3Q13 earnings call, management noted that it expects natural gas rigs in 4Q13 to average 340, with the drop in rigs due both to normal seasonality in winter months and increased efficiency allowing upstream names to produce more with fewer rigs. Natural gas rigs drilling actually averaged 370, compared to the forecast of 340 and the 3Q13 average natural gas rig count of 380. One factor that may have helped to support natural gas rig counts is that natural gas prices had a strong rally over 4Q13
While I'm bearish on natural gas over the short term, and would use the recent rally to lighten or exit my natural gas ETFs, I'm more bullish on the long term.
Bullish long-term trends are:
Regulations: The current administration and EPA have created an anti-coal climate that is called "Obama's War on Coal" in the media. President Obama even mentioned "climate change" in his State of the Union address even though we are experiencing one of the coldest winters in decades, and global temperatures have been flat for over a decade. Because wind and solar aren't viable alternatives to coal, and only account for around 3% or total energy production anyway, natural gas is the natural alternative fuel for electricity production. Regulations should drive demand higher going forward.
Exports: Right now we export liquefied natural gas (LNG) on a case by case basis. The effective ban on exporting unrefined fuel from the United States has created tremendous market distortions. Natural gas prices are much much higher overseas. In Japan natural gas prices are over $15/mmbtu, or almost 3x what they are in the United States. Changing the nation's energy laws to greatly fascilitate LNG exports could/would drive natural gas price higher, and stimulate a production surge. LNG export companies like Cheniere Energy should greatly benefit. Additionally, many jobs would be created as well, a goal President Obama stressed in his recent State of the Union speech.
In July, the Washington-based American Council for Capital Formation came out with a report titled, "Liquefied Natural Gas: Why Rapid Approval of the Backlog of Export Applications is Important for U.S. Prosperity," authored by the vice president, Margo Thorning.
(click to enlarge)
Gas to Liquids or GTL: GTL is said to be profitable at a 11 to 1 price ratio of a barrel of oil to natural gas. Right now it is $98/$5, or about 20 to 1. The economics are very compelling, and large plants already exist overseas. An "all-the-above" energy policy that would put GTL on parity with other alternative fuels and allow it to be part of the EPA's RFS2 program would greatly increase the probability of GTL coming to America. The increase in demand for natural gas would almost certainly provide support for its price.
In conclusion: While I would use the current increase in natural gas prices as an opportunity to exit my positions, I am not bearish long-term. America is the Saudi Arabia of natural gas and coal. Sooner of later the political winds are bound to change, and America will once again embrace job creation and energy production. Overseas in Germany, Japan and the UK the politics are already shifting away from fighting climate change and toward economic growth and job creation. With jobs No. 1 on the minds of the American public and fighting climate change dead last (WSJ Graphic Below), if President Obama wants his policies to reflect the will of the people, embracing proven traditional energy sources like natural gas and coal would be a sure way to establish his legacy as the jobs president. If that happens, natural gas has a very bullish future. Exports, favorable regulations and technological advancements could all dramatically change the future prospects for natural gas. All it takes is one election to change the job killing export laws and regulations. That is why I'm bullish long-term for natural gas. The American people want jobs, and eventually they will vote to get them.
Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: I am long REGI Calls.
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at http://ift.tt/jcXqJW.
Aucun commentaire:
Enregistrer un commentaire