Consequently, natural gas prices quoted on the New York Mercantile Exchange hovered in the $3 to $5 range last year, or way below the nearly $16 price in late 2005 after hurricanes Katrina and Rita rocked the Gulf of Mexico and caused supply-and-demand imbalances in the opposite direction.
In early May, when oil traded at roughly $114 per barrel and natural gas was priced at about $4.70 per million BTU, the price ratio of oil to gas was about 24 to 1, or two to three times greater than normal.
In other words, natural gas is dirt cheap vis-à-vis oil. And with more gas coming from the Marcellus Shale, as well as from other shale developments in Texas, Arkansas and Louisiana, along with other unconventional gas plays throughout North America, it would seem prices will get cheaper and the market will remain depressed.
Not so, say some observers. "Everyone on the planet is bearish on natural gas, so it's the perfect time to be buying," says Shawn Hackett of Hackett Financial Advisors, a Boynton Beach, Fla.-based money management firm focused on commodities. His rationale: Booming production will enable the U.S. to become an exporter of natural gas and tap into the LNG markets of Europe and Japan, where he says natural gas is consistently priced in the $10 to $12 range.
Most U.S. natural gas is shipped domestically in a raw, gaseous state through pipelines. The product is composed primarily of methane, but can also include ethane, propane, butane and pentane. The gas can be converted into a liquid through cooling, to about -260 degrees Fahrenheit. This reduces it to 1/600 the volume of gaseous gas, which makes it easier to ship abroad.
The U.S. is beefing up its LNG exporting capacity with three shipping facilities approved and under construction in Louisiana, Mississippi and Georgia. Twelve others have been approved around the country but not yet started. Hackett believes selling U.S. gas into foreign markets and exposing it to global pricing will create a permanent structural shift in the market. "We'll never see prices below $4 again once the global market takes root," he says.
One of the companies Hackett likes is Cheniere Energy Inc., a company that's developing LNG export facilities along the Gulf Coast. Appropriately, its ticker symbol is LNG. Among his other top natural gas picks is Heckman Corp., a diversified water company that treats fracking water used in shale-drilling operations.
Among drillers, one of Hackett's top picks is Chesapeake Energy Corp., which he considers a blue chip company in the space. He also likes Galleon Energy, a smaller, under-the-radar oil and gas driller in Western Canada. "It's highly leveraged to rising gas prices, and if gas went to $6, $8 or $10, they'd be hugely profitable."
Tim Atkinson at the Guinness Atkinson Global Energy Fund says aside from drillers with significant natural gas assets such as Chesapeake, Devon Energy Corp., Apache Corp. and Noble Energy Inc., another way to play the gas patch is through companies with a lot of pressure pumping assets, such as Halliburton Co. and Patterson-UTI Energy Inc. "Pressure pumping is a big beneficiary of shale gas development," Atkinson says.
Natural gas is touted as a cleaner and--at least for now--cost-effective alternative to cheap but dirty-burning coal, while concerns over nuclear safety in the wake of the recent disaster in Japan have boosted the attractiveness of natural gas as an energy source. Texas billionaire oilman T. Boone Pickens is pushing a plan to convert 8 million U.S. trucks from diesel to compressed natural gas as a way to help cut our dependence on foreign oil.