For those global macro investors that have been long of natural gas this year, it has been an ugly relative ride. Some might even say, coyote ugly. In fact, natural gas at the Henry Hub fell to $2.25 per MMBtu last week, which is its lowest price since February 15, 2002 when natural gas traded at $2.18 per MMBtu. This isn’t surprising given that natural gas inventories continue to pile up and are currently 18 percent above their five year range and on pace to exceed the all time high level of 3,565 billion cubic feet, which was recorded in October of 2007.
The commodity investment race is not even close this year. Crude oil is up ~+59.4% and natural gas is down ~-50.4%. Obviously a primary fact that has worked in oil’s favor is that it is a global commodity that is priced in USD, so USD down will naturally equal oil up. Any commodity trader that has abided by our “Burning the Buck” call this year is sitting pretty on his energy book at the moment. Conversely, the natural gas longs, who have been focused on the Dennis Gartman-esque investment thesis that was based on the extremes of the oil / natural gas ratio (outlined in the chart below) have been on the wrong side of the pain trade.
The benefit to low natural gas prices will of course be seen this winter for consumers. As the Beccy Tanner from the Wichita Eagle reported yesterday:
“ The price of heating a home with natural gas is expected to be half what you paid last year — that is, if the hurricanes don't disrupt fuel supplies to Kansas or snow and ice storms don't blanket the state later this year. The market price can change, it all depends on the weather," said Dave Springe, consumer counsel for the Citizens' Utility Ratepayer Board in Topeka, a state agency charged with representing consumers in utility cases. "But generally, the news is good. What we are seeing right now is that natural gas prices are at all-time lows. Average household savings of $200 to $300 for the winter are possible. In this economy, this is good news for consumers, said Al Walker, a spokesman for Kansas Gas Service, a utility company that provides service to 642,000 customers in 343 Kansas communities. The utility, which adjusts its cost of gas charge monthly, now charges $5.19 for 1,000 cubic feet of gas, compared with $10.47 a year ago.”
For the average consumer who pays a $400 - $500 dollar heating bill in the winter, the decline in natural gas prices will provide some real relief versus last winter.
Also, as natural gas stays at low relative prices, it’s possible that it may take some share from coal and oil, which is longer tail and prices relative to transportation demand. In fact, we saw increased focus on this issue in congress this week. Specifically, Senator Schumer, Democrat of New York, stated that “the Senate is more open to natural gas as a transition fuel than the House was, but the Senators from the coal states who are crucial votes are going to want first consideration for coal.” Oil is currently trading at roughly $11.70 per MMBtu, so on an energy equivalency basis almost 4x the price of natural gas, which is a real and tangible factor in the long term.
According to most estimates, coal provides roughly half of the electrical power in the United States, while natural gas provides roughly 20%. As is widely known, natural gas is also much more environmentally friendly. In fact, on every pollutant level natural gas scores more favorably versus oil and coal. We’ve outlined this in the table below:
The reality is this: with lower pollutant levels, a cheap relative energy price, and ample domestic supply, natural gas will have its day, but investors, as they have learned in the year to date, can only focus on these long term trends, in lieu of short term fundamentals, quantitative levels and global macro factors, at their peril.
Daryl G. Jones