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Why Now May Be the Perfect Time to Start Investing in Natural Gas

February 22, 2011

by Eric Hammer | FTMDaily Contributing Writer

TEL AVIV, Feb. 22 – Is now the time to be investing in natural gas? I’d have to say that it definitely is. I think the biggest reason why natural gas is set for an explosion in prices (no pun intended) is what’s been happening in my neck of the woods.

I’m an American living in the Middle East, in a suburb of Tel Aviv to be exact. And what I see from my vantage point is that increasing disruptions in this area of the world mean that energy prices are set to fluctuate wildly. This means that the potential for both oil and natural gas prices to spike is fairly huge.

Already here in Israel, we’re seeing some concerns regarding natural gas because of the fact that Egypt’s recent revolution means our supply from that country has been cut off (due to a terrorist incident which destroyed the pipeline that was built as part of the 1979 peace accords) and we’re forced to find other ways to generate electricity and to increase production of our own domestic supplies, both of which have been pushing up natural gas prices in this country.

Natural Gas is a Local Product

Now before you get too excited about the Middle East, I should make sure to point out that natural gas, unlike oil is not really a global product. It’s very much a regional product, meaning that it’s typically sold not too far from wherever it is extracted from the ground.

The reason is that natural gas is fairly difficult to transport when compared with oil, so it tends to go via pipeline and only over regional distances, not intercontinental distances.

Oil Shocks Should Affect Natural Gas Prices As Well

However, in spite of the nature of natural gas, I do believe that the oil shocks coming out of the Middle East will have an indirect effect on prices in the United States, meaning that investing in natural gas is a good idea right now.

That’s because as oil continues to get more expensive, it’s only natural that companies that had been relying on oil for generation of electricity will turn to natural gas. Plus, many public transportation companies, which traditionally relied on gasoline powered buses, have been switching to natural gas to gain some relief from high oil prices.

This in turn should push up the value of natural gas stocks, making them a solid mid to long term investment.

What about Shale Gas?

Now here’s the real beauty of my prediction that natural gas prices are going to rise over the next few years: Shale drilling for natural gas, where you drill into a type of rock called shale had not been feasible until recently.

This meant that natural gas reserves were a much more finite resource than they might otherwise be. However, recent advances in technology have finally made the massive new reserves of shale gas available for extraction. This should push down prices, right? Not really.

While shale drilling should keep natural gas from getting insanely expensive, it’s still not going to keep the prices at the lows we’re seeing now (under $4 per million BTU). That’s because shale drilling is a fairly expensive process and it won’t be possible to turn a profit for less than around $6-$8 per million BTU, therefore, ultimately, I see investing in natural gas as being a good way to turn a profit over the next few years.

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