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Natural resource investors take heart: So far in 2014, commodities and many commodity-related stocks are performing far better than the dismal results posted last year.
It was not easy being a resource bull in 2013, as overall commodity prices rose just 0.8 percent. Stocks by comparison left commodities in the dust with the S&P 500 surging 32.4 percent. And even the flat average results mask deeper carnage in certain commodity markets.
* Agricultural prices took a beating. Wheat prices fell 16 percent, while corn plunged 36 percent.
* Industrial metals were nothing to cheer about either. Nearly every metal from aluminum (down 17 percent) to zinc (1.2 percent decline) fell last year.
* And of course the granddaddy of commodities, gold, plunged 28.7 percent.
But natural gas was one of the few commodities to buck the downtrend, and saved its best-for-last, with prices surging 15.9 percent in December alone.
Natural gas has continued moving sharply higher as the thermometer plunged throughout most of the U.S. so far this year. Colder than normal weather blanketed much of the U.S. in December and January, triggering draw-downs in natural gas inventories due to heating demand.
At the same time, natural gas production was reduced due to freezing temperatures in the oil and gas patch … a “perfect storm” for higher prices. And this upside move may just be getting started.
That’s because natural gas has a persistent seasonal tendency to rally from February through April, usually driven by demand for heating, which is certainly the case this year.
The move could be even more pronounced this year, because natural gas prices are coming off an extreme low. Prices peaked in mid-2008 and endured a painful bear market in recent years after booming domestic production led to a glut. Natural gas prices collapsed a stunning 68.7 percent from the 2008 peak to last year’s low.
Now, supply and demand appear to be back in balance with a cold winter to tip the balance in favor of higher prices. But there are longer-term non-weather related reasons to be bullish too.
Domestic natural gas prices are still dirt cheap compared to the rest of the world.
In Europe for instance, natural gas customers in Germany pay more than twice as much as in the U.S.
And in Japan, the cost is more than three-times the equivalent U.S. price!
The sharp price differential is leading to a booming U.S. export industry for liquefied natural gas (LNG).
Domestic production of natural gas is expected to grow steadily over the next 25 years, according to data from the International Monetary Fund (IMF). But domestic consumption should also expand by 23 percent over the next 25 years, driven mainly by electric utilities switching from coal to cheaper and cleaner natural gas.
But the real boost to natural gas prices longer term should come from exports.
According to the IMF, the U.S. will become a net exporter of natural gas within three years. Explosive growth in exports will be the catalyst, as U.S. shipments of LNG are expected to surpass 2 trillion cubic feet (Tcf) within five years, growing to 3.5 Tcf by 2029.
Ironically, energy-rich Mexico will become one of our best export customers. Natural gas pipeline shipments south of the border are expected to surge more than 400 percent in the next 25 years.
The long-term potential for natural gas hasn’t been lost on today’s investors either. Natural gas utilities is one of the few stock market sectors to gain ground so far this year, up 5.5 percent in January.
One way to play the uptrend in natural gas is with the First Trust ISE-Revere Natural Gas Index Fund (FCG). This fund holds a diverse basket of 29 leading U.S. and Canada companies involved in natural gas exploration and production. It’s an ETF with the potential to really heat-up your investment returns should the winter weather stay cold.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.