Natural gas is the place to be

We’ve commented on Jim Cramer, former hedgefund manager and now tv personality, throwing in the towel and arguing sell, sell (or even better, short). He has one exeption though, and he’s not the only one… 

For Jim Cramer, 2008 is the year of natural gas. He argues that “the way to play the higher oil prices not through oil, but via natural gas.” Here are link to a number of videos where he argues the case for natural gas.

Here, he argues that while big integrated oil companies have not moved when oil took another lurch upwards from $100 (various reasons for that, they hedged, didn’t believe the rally is sustainable, or had backfiring contracts with foreign governments), there are stocks that moved (like ULP, APA, APC, and CHK). Why?

all of these companies share a common theme: They are constantly on the move, acquiring assets and drilling for more and more oil and natural gas.

One reason is that US utilities have problems with building new coal power plants, quite a few were canceled (TXU cancelled 12 of them!) and Congress hasn’t given clear environmental guidelines (a Georgia judge gave a ruling a couple of weeks ago, stopping the building of another coal power plant), so there is a lot of uncertainty surrounding coal.

The perfect solution: natural gas power plants: clean, cheap, available (in the US). So it’s likely that demand for natural gas will go up further in the US. The natural gas stocks have already been the best performing stocks in the US stockmarket.

Also, foreign suppliers used to dumb LNG into the American market, because there used to be a surplus of LNG worldwide. No more, there is now a shortage of LNG worldwide. LNG prices in Asia are trading at a considerable premium compared to the US (where it trades at $13 per Mcf).

Another reason is that natural gas is still cheap compared to oil on an energy equivalence basis (which is roughly 6:1), again, Cramer:

Cramer noted that typically, the ratio between oil and gas is 6:1. Using that historic ratio, natural gas could go as high as $23, but Cramer is sticking to his earlier estimates of just $16 for the commodity.

Cramer is not the only one to find a sole brightspot in natural gas, the following quote is from an even more gloomy (on the general market) recent report by the BMO group (July 3 report, p33)

Remain overweight the oil and gas stocks. We think the upside potential for natural gas now exceeds that of oil.

We argued earlier that the rally in oil will peter out soon (at least for now), but natural gas, that’s quite another story. It still has a lot of catching up to do. Jim Cramer:

“oil can go back to $80 and natural gas would still be cheaper.”

Here is another source which is bullish short-term (it doesn’t contain a longer-term outlook apart from also noting that gas is cheap compared to oil on an energy equivalence basis) because natural gas hasn’t followed the latest lurch upward in oil (and it normally follows oil, according to the article). There is also some info on how to trade natural gas, but we have our own suggestion and we’re pretty sure you know which company we have in mind..

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