Natural Gas: The Realistic Choice

Energy Strategist (08/23/2010)
Natural gas prices have been depressed for more than a year, and stocks levered to the fuel have turned in a mixed performance. This weakness has led many investors to the unfortunate conclusion that natural gas isn't an interesting investment story.

Nothing could be further from the truth. Gas, an abundant and environmentally friendly fuel, is already revolutionizing key global energy industries like petrochemicals. And nat gas is a far more viable alternative to oil in the transportation sector than any other widely hyped alt energies.

Natural Gas: The 21st Century Fuel
The two main sources of natural gas demand are electric power generation and industrial applications. The key question is why companies would choose to use gas to produce electric power, as an industrial fuel, or as feedstock rather than coal and oil.

In markets where natural gas competes with oil, gas' main advantages are its ready availability and lower price. The following chart shows the price of crude oil compared to U.S. and UK nat gas prices.
the price of crude oil compared to U.S. & UK nat gas prices ('97-'07)

Natural gas is considered a regional fuel. The U.S., for example, has obtained its gas from a combination of domestic production and imports from Canada. Although gas imported from further afield in the form of LNG has become a more meaningful component of N. American supply in recent years, it's still a relatively small part of the supply mix. Similarly, Europe has traditionally obtained most of its gas from North Sea production and via pipeline from Russia. As a result, nat gas prices can differ widely between world regions.

Greater availability and reliability of supply means natural gas prices will remain relatively cheap vs. oil. From 1996–2006, the ratio of U.S. oil to U.S. natural gas prices on an energy-equivalent basis averaged 1.2-to-1.

Transport is a huge potential growth market for natural gas. The U.S. consumes around 9M bbl/d in the form of motor gasoline alone. On an energy-equivalent basis, that's more than 50 bcf of natural gas equivalent per day. When you consider that total current U.S. consumption is around 60 bcf per day, replacing even a small part of the gasoline market with natural gas would imply an enormous increase in total natural gas demand.

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