The natural gas market has been the best performing commodity of the year. We called a major low in January and we are continuing to ride and roll over that position. While in the short-term the market is starting to look a bit over-bought, we have held to our bottom prediction not only in the short term but a bottom that you can build off going out into the future.
The commodity markets tend to trade in cycles and for natural gas the cycle has been very clear. Back in 2003, the then-Fed Chairman Alan Greenspan warned us that our declining production of natural gas was putting the economy at risk. "We're going to see some erosion in a number of macroeconomic variables" if gas prices stay high, Greenspan told the House Energy and Commerce Committee.
Prices then of course soared. And along came the fracking revolution and prices came down.
The reason for my call was we believed that the commodity cycle for the gas market had changed again. For the first time in two years the growth of demand for the natural gas should start to outstrip production increases. Low prices cure low prices and because of the cleaner burning properties of gas, its future is bright. Warren Buffet of Berkshire Hathaway owner of the Burlington Northern railroad is looking to o switch their locomotives to natural gas. Bloomberg reported, “BNSF is working with its locomotive suppliers like General Electric Co. and Caterpillar Inc., to explore buying units that would run on natural gas." Burlington Northern is the biggest consumer of diesel other that the US Navy.
In March The Wall Street Journal reported, “Truck fleets are likely to make a major shift to natural-gas fuels and away from diesel over the next decade, with FedEx Corp. a likely adopter, said Frederick W. Smith, chairman and chief executive of the shipping company. In an interview with The Wall Street Journal, Mr. Smith said he expects between 5% and 30% of U.S. long-distance trucking to be fueled by compressed or liquefied natural gas over 10 years, as the cost of the trucks declines and fueling stations become more common. "If you'd asked me three years ago, I'd have said this is very tough, because the infrastructure wasn't there," he said.”
We are starting to see demand that hit a record high in November get in better alignment with production. Natural gas rig counts jumped 2 from a 16-year low showing that if we are going to meet the demand expectations of the future we are going to need higher prices.
Yet now as the market is beginning to rise the bulls are coming out of the woodwork. Not only are many raising their calls higher, they are now exceeding my call of $7.00 gas by 2015, which even I have to admit is looking conservative after this explosive run. Commodity funds have been loading up on gas and a sea change of attitude when a prediction of $7.00 gas by 2015 seemed like wild speculation. Now it is starting to look low.
Many may wonder how we saw this coming when many were stuck in the natural gas glut mentality. Why have we recommended being long on our trade levels and keep as a possible position trade? We noted that natural gas broke up into its December trading range from its lower first half of January trading range and the longer term strips seems to suggest that it might be time to be thinking about natural gas from a long term outlook.
We spoke about the increasing odds of natural gas exports. Not only the fact that natural gas prices in Europe and Asia will pressure the U.S. to increase exports as reported by Bloomberg News on Feb. 22, “Gas for delivery in three years may rise to between $5 and $8 per million British thermal units should LNG terminals from Texas to Oregon start moving cargoes, according to estimates from BNP Paribas, Price Futures Group and Barclays Plc. That’s at least 14% higher than where markets are pricing 2016 gas today, based on Bloomberg Commodity Fair Values. As much as 10% of U.S. output is likely to be earmarked for export as LNG by 2016, according to Goldman Sachs Group Inc. estimates.” “Gas for delivery in 2015 costs an average of $4.21 per million Btu and $4.40 for 2016, according to Bloomberg Commodity Fair Value data. That may be underestimating the potential price if more export projects are approved, according to Phil Flynn, a senior market analyst at Price Futures Group in Chicago. “The LNG thing is going to happen,” said Flynn, who sees gas rising to $7 per million Btu in 2015 before trading in a range of $6 to $8. The market isn’t pricing in the LNG export potential yet because, “there is a little bit of a denial on how quickly natural gas exports can get done,” he said. “We’ve had this bearish outlook on gas a long time.”