ETF strategy: patience the key to natural gas

The price has swung wildly throughout January, buffeted by a push-me-pull-you of news flow. The mild winter saw prices hit a 10-year low on 19 January, down by close to 45% year-on-year, which prompted several gas giants, including Chesapeake and ConoccoPhillipps, to slash production this year.

Those announcements, coupled with president Obama’s subsequent commitment to offer incentives to companies switching from oil to natural gas sparked a swift 17% rally.

But the bad news didn’t take long to reassert itself, with the US Energy Information Administration last week reporting that reserves have reached 3.1 trillion cubic feet – some 21.4% above the five-year average.

Cue a 4.5% slump to $2.65 per 1,000 million cubic feet (mmcf) and a welter of investors wondering whether the latest fall represents an attractive entry point or a value trap. So where next for natural gas?

Investec Asset Management is firmly in the bull camp, pointing to a range of factors that will drive demand and a likely correction in the decoupling of US and other gas prices in 2011. 

While US prices slumped heavily last year, ending the year below $3/mmcf, prices in Asia and Europe strengthened further in 2011 to around $15/mmcf and $10/mmcf, respectively.

‘We can’t see why the market will not rebalance in 2012,’ says Mark Lacey, co-manager of the Investec Global Energy fund. ‘Our current assumption for 2012 is for US natural gas to average around $4/mmcf gas in 2012 (versus an assumption of $4.75/mmcf three months ago).’

This equates to a potential upside of 25% from current prices and Lacey believes this is not unreasonable given that global gas demand is expected to grow by between 3% and 4% over the next decade – three times the rate of oil demand growth. Demand from China alone is being slated to rise by 15% a year over the same period.

‘Following the Fukushima disaster in March 2011, government global energy policy has accelerated the desire of emerging and developing consumers to secure contracted gas volumes,’ he says. ‘It is clear that natural gas is going to be the preferred fuel for power generation over the next 50 years.’

Short-term downsides