4 Reasons to Consider Natural Gas

By Kevin Grewal

Oversupply in the natural gas market has taken its toll on the commodity, but some investors are flocking to it and for good reason.

First of all, the parts of the nation that historically use natural gas are expected to witness colder temperatures than normal. According to the National Oceanic and Atmospheric Administration, winter temperatures from southern and eastern Texas to southern Pennsylvania and down to the tip of Florida are expected to be colder than normal, which will likely spur the demand for natural gas.

Secondly, macroeconomic conditions are favorable for the odorless gas.  An unstable dollar, fears of inflation and a low interest rate economy are making commodities attractive.  Many have fled to gold, but crude oil and natural gas also give investors a hedge against inflation and a declining dollar. 

The third factor that may boost natural gas is the expectations for economic growth both domestically and internationally.  The growth is expected to boost consumption in residential, commercial and industrial sectors.  Additionally, the EIA expects total marketed natural gas production to decline by 3.1% in 2010, which could potentially eat away at some of the excess supply that has flooded the market.

Lastly, prices of natural gas are expected to increase in the coming months as space-heating demand rises. 

Some equities that could benefit from the aforementioned include:

  • Chesapeake Energy (CHK), up 66% from a March low of $13.50 to close at $22.44 on Wednesday
  • Piedmont Natural Gas (PNY) up 17% from a March low of $21.25 to close at $24.80 on Wednesday

The United States Natural Gas (UNG) is a third way to access natural gas.  The ETF has had its ups and downs as it holds futures contracts and can be affected by contango or backwardation as well as regulations imposed by the Commodities Futures Trading Commission (CFTC).  UNG is up 7% after witnessing a low on December 3rd

Investing in natural gas has its risks and a good way to mitigate these risks is through the use of an exit strategy.  According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned equities could come to an end at the following price points: CHK at $21.85; PNY at $23.94; UNG at $8.98.  These price points change with market volatility and updated data can be found at www.SmartStops.net.

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