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Natural Gas

01/18/2013

Yesterday, the Energy Information Administration reported that stockpiles (Figure 1.1) of domestic natural gas fell 148 billion cubic feet to 3.168 trillion. That places current storage levels 4.4% below this time last year. The five-year average (Figure 1.2) still has an 11% supply surplus but is down significantly from last March’s 61% supply surplus.  In my May 9, 2012 blog “Time To Dabble In Natural Gas,” I expressed the belief that natural gas prices had troughed. Today’s blog should be used to strengthen investor’s conviction that natural gas investments should be maintained, and potentially added to, if spot prices can elevate above November 23, 2012’s high of $3.933.

According to the NOAA, 2012 was the warmest year on record since 1895. Average temperatures were 55.3 degrees, 1.0 degree above the previously warmest year on record, 1998. The warmth contributed to residential and commercial usage declining to a five-year low. Additionally, the first half of 2013’s winter has been warmer than normal, the main catalyst for declining natural gas prices since late November. However, despite some obvious bearish conditions, natural gas prices have resiliently held up above the $3 level. Technicians are encouraged that prices have been unable to trade back below the 200-day moving average of $2.97. The natural gas market (Figure 1.3) has absorbed all of these bearish conditions and is now well positioned to challenge the $4 level.

Investors should not base further price appreciation, and their investments, on the potential for a cold second half to the winter. Maintaining and potentially adding to natural gas investments are predicated on:

  •  Further power generation reliance on natural gas over coal
  • The warm first half of 2013’s winter has delayed the return of rigs (Figure 1.4) to dry gas production
  • Overwhelmingly negative sentiment for 2013 natural gas pricing
  • Speculative long positioning by commodity funds currently at underweight

 Investors should favor owning the debt and equity of exploration and production companies with a strong presence in South Texas Eagle Ford, Western Texas/New Mexico Permian Basin, and North Dakota/Montana Bakken fields.  Other natural gas investment themes include MLP infrastructure and distribution, LNG transporters, and wet gas producers.

 Figure 1.1 U.S. DOE Weekly Storage

Source:  Bloomberg

 Figure 1.2 U.S. DOE 5-Year Average Weekly Storage

Source: Bloomberg

Figure 1.3 Natural Gas Spot Prices 2012-2013

Source:  Bloomberg

 Figure 1.4 Baker Hughes U.S. Natural Gas Rotary Rig Count 
 
Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.