Natural gas beating gold for the sleep-at-night

Getting Burned

For most of the past decade, investors have been burned by gas. Prices rose as high as $15.78 in 2005, then fell to a 10- year low of $1.902 in 2012. Even as it rebounds this year, it is still the most volatile commodity in the GSCI index, with a reading of 40.4, compared with 46.7 in the prior decade.

Among the casualties of the price swings is the biggest leveraged buyout in history, the $48 billion takeover of Dallas- based Energy Future Holdings Corp., known as TXU Corp. before it was bought in 2007. KKR & Co., TPG Capital LP and Goldman Sachs, who led the deal, took a gamble that rising gas rates would push up power prices and give its nuclear and coal-fired plants a competitive advantage.

As prices fell, earnings declined and the power company struggled under its debt load. Energy Future Holdings this month reported its ninth consecutive quarterly loss as the value of contracts to lock in the price of natural gas declined. The company is seeking to restructure at least $32 billion of debt.

‘Shale Revolution’

Improved technology for extracting gas from shale formations across the U.S. has unlocked record supplies, driving prices lower over the past years. Producers use a technique known as hydraulic fracturing, or fracking, which involves pumping water, sand and chemicals underground to release gas embedded in rock.

The U.S. surpassed Russia as the world’s largest gas producer in 2009, data from BP Plc show. The boom in oil and natural gas output helped the U.S. cut its reliance on imported fuel. The country met 84% of its energy needs in 2012, the most since 1991, Energy Information Administration data show.

“The shale revolution has helped shape the improving economic environment in the U.S., making U.S. natural gas and the U.S. economy the new safe haven,” Goldman’s Currie said in the April 16 report.

Gundlach’s Comparison

U.S. gas output may climb 1% to a record 69.9 billion cubic feet a day this year, according to the EIA. Soaring production and mild weather brought inventories of the fuel to an all-time high of 3.929 trillion cubic feet in November.

By April of last year, prices had dropped so low that Jeffrey Gundlach, the top performing bond-fund manager, compared it with gold in 1997, before the surge in the metal’s price. As 1997 ended, spot gold traded at its lowest price since 1979. The precious metal retreated 21% for the year and posted losses in each of the next three years. Since then, the price has risen more than fivefold, gaining for 12 straight calendar years.

The low price of gas and ample supply have fueled demand from industrial consumers and electricity generators. Consumption of the fuel by industrial users, including chemical companies and aluminum plants, increased 4.3% in February from a year earlier to 22.2 billion cubic feet a day, the most since February 2004, according to the most recent data from the EIA, the Energy Department’s statistical arm. Demand rose 2% from January, the seventh consecutive monthly increase.

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