Is Natural Gas A Good Investment Opportunity?
Commodities / Natural Gas Jun 14, 2015 - 04:02 PM GMTBy: AnyOption
Anyoption writes: When it comes to investment options, everyone has their own opinion with regard to just about any option. However, there are few options in the industry that are as heavily debated as natural gas. Those who think it's a great opportunity point to the low cost, high efficiency and slow growth in comparison to crude oil as a reason that steep inclines are just around the corner. On the other hand, those that are bearish on the commodity argue that prices will be kept low, and most likely decline as the result of the massive amounts of natural gas that are available and being produced. So, which side is right? Well, both of them to an extent. Here's how I see it...
The Bulls Hit The Nail On The Head
After doing quite a bit of research, I've come to the conclusion that the bulls have incredibly valid points. Here are the main factors associated with the bullish side of the equation...
- Natural Gas Provides A Big Portion Of US Energy – The United States is one of the largest energy consuming countries in the world; and a good portion of the energy we consume happens to come from natural gas. Here in the States, we use the commodity to heat homes, generate electricity, and even run cars. All in all, natural gas accounts for the base of around 23% of the overall energy consumed in the United States; so, there's no doubt that the commodity is in demand.
- Clean Energy – As consumers around the world continue to grow more conscious of the effect of human life of the environment, natural gas is becoming more and more appealing. The reality is that while natural gas is a fossil fuel, it's by far the cleanest one we have available. The reality is that natural gas produces far less carbon dioxide than oil and coal; 29% and 44% less respectively. So, as civilization continues to push for protecting the environment, it's likely that demand for natural gas is going to grow.
- Natural Gas Production/Availability – In the past, we've seen what happens to the price of oil when reserves start to become a concern. However, in the realm of natural gas, this concern is incredibly far off. The resource is incredibly abundant. Perhaps even more important than the worldwide abundance of natural gas is the production of the commodity. Currently, the United States is second in the world when it comes to the production of natural gas; Russia is the world's largest producer. It's also believed that the reserve of natural gas in the United States is massive. So, from a political standpoint, it wouldn't be surprising to see the US government do what it can to steer the energy sector away from oil and to natural gas. After all, because the US has such a dominant position in the industry, politicians want us using it more to boost jobs numbers and overall economic stability in the United States.
- Price – Finally, natural gas bulls look to the price of the commodity as a reason to get in now. The reality is that the value of natural gas has fallen by more than 70% in the last year and a half; sending the price to 8 year lows. Those who are bullish on natural gas argue that the commodity will reach support in the market relatively soon; leading to climbs in its value.
After looking at all of the factors above, it's hard to say that the natural gas bulls don't have a point. After all, from an environmental standpoint and political standpoint, the commodity seems incredibly appealing. After adding in demand and price points for the commodity, it's one that is incredibly hard to pass up. That is, until you look at the bearish side of the equation.
The Bears Also Bring Up Incredibly Valid Points
There's a clear reason why the topic of natural gas investing is such a heavily debated one. After all, both sides have very valid arguments. On the bearish side of the equation, investors are looking to the reasons for price movement in commodities, and pointing out a few flaws with regard to the ability of natural gas to grow in value. Here's how the bears see it...
To understand the bearish argument on natural gas, we need to start with the reason for price movements in commodities. These price movements dial down to the basics of economics; supply and demand. When supply rises, the value of the commodity tends to fall. On the other hand, when demand rises, the value of the commodity tends to grow; essentially creating a constant tug of war between supply and demand, and causing prices to vary wildly from time to time. With that said, one of the biggest arguments the bears have revolves around the supply of natural gas.
As mentioned above, the United States and Russia are massive producers when it comes to the commodity; and both countries are said to have huge reserves. So, for the value of natural gas to grow from the current level, we're going to have to see a huge spike in demand for the commodity; and while the government may push for the use of natural gas rather than crude oil, the demand spike that would be needed for the value of the commodity to start growing is astronomical; and not likely to be met. All while supply is destined to continue growing; bringing us to the next point the bears bring up in conversations revolving around the value of the commodity.
Supply of natural gas is all but guaranteed to grow. Natural gas is extracted for land through the process of fracking; a process that environmental experts are incredibly concerned about. These experts argued that fracking could lead to severe earthquakes, problems with the water table, and human made environmental disasters the likes of nothing we've ever seen in the past. As a result, energy leases on federal lands associated with natural gas have dropped dramatically; falling 52% during the Obama Presidency. As a result, production growth of natural gas in the United States came to a screeching halt. However, that's likely to change relatively soon.
Earlier this month, the United States Environmental Protection Agency released a draft report with regard to fracking. In the report, the EPA found that hydraulic fracturing (the long form way to say fracking) has not had the “widespread, systematic impact on drinking waste” that environmentalists were concerned about. This report sent the value of natural gas spiraling down because it opens the doors for increased natural gas production in the United States.
While US energy leases on federal lands fell a massive 52% during the Obama Presidency; we're likely to see this figure change dramatically over the next few years. As a matter of fact, BreaitBart.com reported that it is expecting the EPA draft report to open the door for energy leases on federal lands to at least quadruple over the next few years; leading to a massive supply glut in the world of natural gas. As mentioned above, when the supply of the commodity climbs, the value tends to go in the opposite direction; and that's exactly what the bears in the world of natural gas are expecting.
After researching the bearish side of the debate, it's clear to me that the bearish argument is just as valid as the bullish argument. Now, this leads us to a big question...
Where Is The Value Of Natural Gas Headed?
While the bulls do have a very valid argument, after extensive research into the topic, I'll have to side with the bears as I think the value of the commodity is likely to fall over the next few years. This all boils down to the basic economic law of supply and demand. The bulls did hit the nail on the head when it comes to demand growth. Natural gas is far cleaner than any other fossil fuel; and as consumers become more environmentally conscious, I see this playing a big role. Also, with the United States having a controlling position in the natural gas market, there's no doubt in my mind that US governments will push for further use of the commodity. However, I don't think that push is going to be enough to send the value of the commodity up.
As the bears bring up in their argument, production of natural gas is likely to boom. Experts are expecting that in the United States, we are going to see the production of the commodity quadruple, following the report from the environmental protection agency. So, while there's no doubt in my mind that demand for natural gas is likely to grow, there's also no doubt in my mind that growth in supply is going to outpace growth in demand. For demand to match supply growth, we'd have to see demand for the commodity quadruple; meaning that 92% of US energy is produced by natural gas. While anything is possible, that kind of growth simply isn't probable; not within the next couple of years, or even the next couple of decades. With that in mind, as supply outpaces demand, we are likely to see declines in the value of natural gas.
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