The Heat Helps Natural Gas

 | Jul 05, 2012 | 12:30 PM EDT
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I'm watching the country literally burn up from the incredible heat wave sweeping the Midwest and I'm thinking about global warming. 

But I'm also thinking about natural gas.

Look, I've been working hard to try to move our conversation on energy policy that will limit carbon emissions and lower our global footprint. But what's wrong with also trying to position ourselves to make money from that inevitable trend? I say "nothing."

And natural gas, as anyone who's read my columns at all knows, is one of my very surefire recipe components to getting us on the right track to a cleaner and more efficient energy future.

And let me tell you this.  There's nothing that will begin to spark the move upwards in natural gas through the summer and beyond like the kind of brutal and tropical heat wave now gripping much of this nation and helping to spur the many fires raging in the West. 

That's simply because when the heat goes up, so does the load on the nation's electric grid to try and cool things down, a grid powered mostly by natural gas.

The warm winter that just passed put a very small load on heating and helped to run up stockpiles of natural gas to the point that we saw prices on natty even hit a 1 handle briefly. The thought among analysts was that with the pace of usage slowing, while the production from shale assets continuing apace, it was possible that virtually all of the storage available for natural gas would be occupied by October, completely cratering the market and their associated stocks.

This heat wave ensures that that won't happen.

And slowly, but surely, production of natural gas has been falling this summer.  Driven by low prices and voluntary sequestering, we're finally beginning to see a drop in production from breakneck levels. Add that to a slow but steady conversion of utilities to gas from coal (a trend that continues to kill the coal sector) and you've got the beginnings of a turnaround in natural gas prices, one that will have real legs.

August gas is now nearing $3/mmBtu. And I expect it to reach $4/mmBtu by the start of the fourth quarter.

That isn't much of a gain, I'll admit, considering the heights that natty has risen in the years up until 2007. But a rally like that will really jump start some natural gas stocks that are still at historic lows and still represent by far the best value in the energy space.

Again, if you're a regular reader of mine, these names will come as no surprise, but why should they? I like the best-run, least-leveraged and dedicated natural gas names out there. My thinking is if you're going to bet on natural gas, don't muck it up with an integrated group, go for the gold.

So, here they are again, all at prices that seem to me very juicy indeed: EnCana (ECA), Ultra Petroleum (UPL) and Sandridge (SD). 

The heat in the center of the country is hurting so many. But it's likely going to be a kickstarter for natural gas. And that's good. 



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