Profit from the Coming Natural Gas Crisis
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Oil prices get all the headlines, but the natural gas supply/demand imbalance is set to push us into crisis mode... So what can you do about it? Follow the money. ..
Oil prices get all the headlines, but the natural gas supply/demand imbalance is set to push us into crisis mode. So what can you do about it? Follow the money. With surging prices, natural gas stocks look to be among the strongest in the market for a long time…
Bad news is right around the corner for many of us. As colder weather approaches, demand for natural gas will rise as people heat their homes. This year that is expected to be nothing less than disastrous, especially if this winter is colder than normal. We may have laughed when the folks on CNBC brought out the Farmer's Almanac, which is forecasting a colder-than-normal winter for much of the Northeast, but any severe cold snap will send natural gas prices soaring. The truth is we must be prepared to see our utility bills rise 30% or more this winter.
Hurricanes Ivan, Katrina and Rita represented a one–two–three punch for natural gas fields in the Gulf of Mexico. One year after Ivan damaged the undersea pipelines—as they were still being repaired—Katrina rolled through and did much more damage. Finally, Rita delivered the knockout punch by hitting the fields that Katrina and Ivan missed. There have been massive undersea mudslides from all of these hurricanes, so the pipelines are now either a jumbled mess or just buried under tons of mud.
It could take a year or more for supplies and inventories of natural gas to return to normal because the U.S. doesn't have enough Liquefied Natural Gas (LNG) ports to supplement the disruption in the Gulf region. At least 12 additional LNG ports would be required to replace the lost output from the Gulf of Mexico. And if you think getting permission for a refinery is tough, local resistance to building LNG ports is even worse. I have to give Occidental Petroleum credit for getting approval for a new LNG port in Corpus Christi, Texas, but it's certainly the exception.
Even before Katrina, there were several factors keeping the supply of natural gas tight and causing prices to rise. Earlier this year, the EPA passed new clean air regulations for power plants. These new rules significantly boost the demand for natural gas, which is a much cleaner fuel that's used to burn coal more efficiently and reduce pollution at coal-fired power plants.
Another major factor boosting natural gas demand is that the Pacific Northwest has one of its lowest snow packs in history. This means that there will be no leftover hydroelectric power for California. Instead, California will be dependent on natural gas "peaker plants" for its electricity. A consequence is that electricity prices will also rise substantially, since electricity generated from natural gas is more expensive than hydroelectric power.
Remember when California had its energy crisis a few years ago? Back then, California didn't have enough natural gas peaker plants to generate electricity during peak demand. Since then, Calpine and other companies have added more natural gas plants, so there shouldn't be any power shortages. Since California will be using much more natural gas, demand will be high, which will help our natural gas stocks.
Even Canada has been having natural gas supply problems. The mining of the tar sands in Alberta hasn't expanded as quickly as previously hoped due to a lack of natural gas suppliers. Both Nova Scotia and New Brunswick are scheduled to build the new LNG ports that virtually no one in the U.S wants. So a lot of the U.S. natural gas imports will be coming from Canada in the future, especially in the Northeast.
When an energy-rich country like Canada has to build LNG facilities to supplement its natural gas needs, it's very obvious that natural gas is in short supply. Now that Canada and other countries are moving ahead with the Kyoto Treaty to reduce worldwide pollution, natural gas will be in strong demand because it's a much cleaner fuel than coal or oil.
Thanks to Europe's interest in a super clean diesel, natural gas has sparked their attention as well. Natural gas is the "cleanest" fuel available (except for nuclear energy) since it burns extremely clean and only emits carbon dioxide. Of all the fossil fuels, natural gas is the cleanest and has a wonderful future.
For all of these reasons, I am especially bullish on natural gas stocks right now.
One of my favorites is North America's largest producer of natural gas—more than 3 billion cubic feet (cf) every day. And it has 8.4 trillion cf of proven reserves—plus 957 million barrels of oil.
This company's cash flow—one of the very best indicators of financial health—rose 12% in 2004. And earnings soared more than 40%!
Best of all, this Canadian company is in the catbird seat, benefiting from rising demand and able to command premium prices. In fact, many natural gas contracts are tied to the price of oil—and with oil likely to stay firm for quite some time (especially now that the new energy legislation is in place) those contracts will be renewed at higher rates.
All in all, it's a great time to own this stock. The name of the company? EnCana (ECA). It's a moderately aggressive stock with a buy-below price of $54.
Louis Navellier, Editor
The Blue Chip Growth Letter
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