Thursday, September 3, 2009

NATURAL GAS : How much lower can it go ?

Looking at the chart below, it's clear that Natural Gas prices are sliding to multi year lows.

Reasons for the continuing slide in prices:
  • Supply far outstripping demand. Natural Gas is a classic example of the rules of commodity demand and supply. (Supply increases relative to demand, and prices drop.)

  • Reduced demand of natural gas from the petrochemical, fertilizer and power generation sectors, given the weak economy!

  • Oil prices are way off their 2008 highs. ( On a relative basis, Oil has outperformed Natural Gas through this period)

  • Natural Gas producers are continuing to add to supplies even as prices are weak. (Some producers are hedged into contracts at higher prices, so they continue to perform steadily for now)

  • Natural Gas production from Oil Shale has resulted in increased natural gas supply.

In the short to medium term, natural gas prices could continue to drift lower, or at least stay weak for a while. The rules of demand and supply, will extinguish any hopes of a quick turnaround.

However, it's worth noting that natural gas prices are at multi year lows. Profitable trades in the commodity market are usually made by buying low and selling high.

The risk - reward equation at this juncture is clearly in favour of the investor/speculator/trader who is '''long natural gas''', even though the supply side picture looks quite bleak at the moment.

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