A lot of people have written asking why The Kelly Letter hasn't bought natural gas via UNG yet. The following June 21 article sent to subscribers, re-displayed here in its entirety, explains why. The addendum at the bottom shows what's happened since we ran the article.
Original June 21 Article sent to Kelly Letter subscribers
We've spent a lot of time looking at oil this year, and have put money on both the long and short side of the fluctuating price. We're currently betting on lower prices ahead, and I still think we'll get them in the short term.
A related commodity that we've discussed much less is natural gas. In some ways, it's a better place to invest than the oil market. Let's look at those ways.
Natural gas is primarily a U.S. domestic commodity, much less exposed to the seemingly endless variety of pressures the world economy puts on oil. That, combined with limited storage capacity, make natural gas less appealing than oil to speculators.
Because of that, natural gas prices have badly lagged oil prices in the recent move higher. A good many analysts attribute the spring oil spike as much to speculation as anything, and a glance at the fundamentals of the market lends credence to their view. The missing speculative element has left natural gas prices far below oil prices and, more importantly, historically cheap when compared to oil prices.
One way that's discussed is via the oil/natural gas ratio. Over the years, it has averaged about 8, which is to say that the price per unit of oil is usually about eight times more than the price per same unit of natural gas. Currently, that ratio is more than double, at 17. Something will give. Either oil prices will fall, natural gas prices will rise, or both. I'm guessing both. We already have money on the falling oil theme. Is it worth putting money on the rising natural gas theme as well?
There are plenty of reasons to expect the price of natural gas to rise. For one, at its current $4 it's not profitable to hunt down and develop new sources of it. That will constrict supply, which contributes to a rising price. Also, there's no equivalent of OPEC in the natural gas market. Overseas sources have a hard time competing because natural gas must be turned into liquid natural gas, LNG, to be shipped. Converting, storing, shipping, storing, and regasifying LNG is expensive, and nobody's going to jump on it at $4 prices. So, the supply picture is looking tight and suggesting higher prices.
What about demand? It's pretty strong. The Department of Energy projects that demand from both Canada and Mexico will grow in the coming years, and that Canada's unconventional production pace will not match that of the U.S. Currently, the U.S. imports about 16% of supply, and that's expected to decline to 3% in 2030.
