Bears Take Over the Natural Gas Market

by | published February 14th, 2011

Just when it looked like the U.S. natural gas market was about to establish a longer-term base, the market responded with a simple three-word reply…

“Not so fast!”

Futures contracts have turned decidedly bearish during the last several trading sessions.

Hedge fund managers have been pushing gas futures down for most of the past week, reaching $3.91 per 1,000 cubic feet (or million BTUs) at close on Friday. (This is the standard NYMEX natural gas futures contract, settled at Henry Hub in Louisiana.)

According to the latest Commitments of Traders report from the Commodity Futures Trading Commission, in the seven days ending February 8, traders’ net-short positions increased by 27%, to levels not seen since December 19, 2008. The short-only portion of those positions has more contracts in it than at any time since October 21, 2008.

These positions are bets that the price of gas will decline further.

There are a number of reasons why the market is ganging up on the short side of this equation (especially when it comes to the hedge fund managers responsible for much of the daily liquidity).

And in this price-depressed environment, there are a number of things investors should look for in gas-producing companies to find sure profits.

Why the Shorts Are Showing Up Now

First, despite bouts of bitterly cold weather across much of the U.S., the decline in stockpiles has been less than expected.

There is still a surplus of well above 2.5 trillion cubic feet, and that will depress any pricing moves to the upside. And prospects that this surplus will subside are not encouraging.

The Energy Information Administration (EIA) – the division of the Department of Energy that provides the data used in calculating trends – is telling us that the inventory stockpiles will remain for 2011.

The EIA short-term outlook calls for more than 1.65 trillion cubic feet to remain in surplus by the end of March and the traditional end of the winter heating season.

Inventories grew to record levels leading into the 2009 and 2010 winter season. The equivalent figure at the end of March 2010 was 1.66 trillion cubic feet – an all-time record that could well be matched this year.

Unlike previous surplus periods, there is now considerably more volume that can be easily brought into the market, thanks to the largesse created by shale gas. That means there is a substantial pressure against rapidly rising prices.

A price level below $4 per NYMEX contract – the level at open of market today – is low enough to prompt operating companies to reduce production. At current levels, the EIA now estimates an average price for the year of only $4.16.

Second, the weather situation is improving… and fast.

Near-term projections call for significantly warmer temperatures throughout the eastern part of the U.S., with averages some 30 degrees higher by the end of this week than the beginning of February. That will translate into a decline in demand of as much as 30% through this week.

Third, unlike the fourth quarter of 2008 – the last time we saw such a spread along the long-short gas curve – the market is not expecting an appreciable decline in demand.

Yet this time around, tanking prices are not reflecting analyst opinions that the economy is moving into a recession or that productivity will be cut.
In fact, industrial usage right now is increasing.

Of the three primary uses for gas (the other two being residential and electricity production), industrial had taken the longest to recover from the crisis. Available volume of gas production to meet it, however, has been increasing even faster.

Medium-term prospects are better. More gas will be used in the generation of power, as new emissions standards take effect in January of next year and more coal-fired capacity is brought off line.

While competition from renewables – such as solar, wind, and geothermal – will increase to replace coal, natural gas remains the alternative of choice.

The application of gas to transportation and the expansion of gas-based petrochemical processing will also improve overall demand, while the prospect of moving gas into export via liquefied natural gas (LNG) is also under active consideration.

The terminal at Cove Point, Maryland – the largest on the eastern seaboard – is considering a move to export LNG to Europe. (See “A Solution for North America’s Natural Gas Surplus,” November 2, 2010.) That is admittedly a move that would take a few years to develop.

Gas has traditionally been a fuel to serve primarily local markets; we are seeing that emphasized again.

That means those regions having ready access to production would fare better with lower prices, and that should prove of great advantage in enticing industry.

These days, the new sources of shale gas will have a pronounced impact on the energy balance.

This is especially the case with the game-changing Marcellus basin, centrally located in the region that was historically the most dependent on importing fuel from other areas – the Northeast.

The ultimate leverage, however, will be found in the cost of production. In a market like the one forming now, demand will actually increase. That is because we tend to use more energy when the price is lower.

In such an environment, the cheaper gas will displace the more expensive.

How to Profit

As an investor, therefore, you will want to acquire the gas-producing companies that have three common elements:

  1. solid gross, operating, and net margins;
  2. a low (and declining) debt-to-earnings ratio; and
  3. central focus upon primary low-cost production assets.

To achieve these three results, companies that compete successfully will all do something very much like the following…

They will cut operating capital expenditures (no reason to produce more if there is no market for it) while maintaining the status of leased acreage (for ready access to enhanced extraction when needed).

These companies will sell or decrease investment in marginal holdings, de-emphasizing locations and non-core upstream/downstream elements, applying the savings to reducing debt.

And they will refrain from exercising options or will liquidate holdings in those basins unlikely to provide a large portion of aggregate production at the most efficient per unit cost.

Because, unlike international oil majors, gas producers have little incentive to become vertically integrated.

Especially in a price-constricted market like this one.



Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at

  1. keith
    February 14th, 2011 at 15:42 | #1

    dr. moors – you recommended the stock MHR when it was a penny stock – do you still recommend a buy for MHR – thanks

  2. william dalton
    February 14th, 2011 at 15:42 | #2

    Bears take over the Nat Gas market and How to proffit….You dont mention the names you would buy that meet the 3 requirements.Can you give me 3 companies that fit this description

  3. Fred Haecker
    February 14th, 2011 at 15:51 | #3

    Why are we not looking at transforming nat gas to diesel and other mid-level fuels through the Fischer-Tropf (sp?) process? This would seemingly simplify the use of nat gas as a transportation fuel without converting engines.

  4. Lee Caldwell
    February 14th, 2011 at 15:53 | #4

    Any particular point to this email notice? Info we already know. No specific recommendations. What’s the point??

  5. Patrick Butters
    February 14th, 2011 at 15:54 | #5

    Dr. Moors,
    What about the price of crude? Are you still expecting 100-150/barrel? I am very heavy in oil companies, both OSD and refiners. Particularly, If you have any information on MVO Trust, I would so appreciate your insight as I hold a great deal of shares in this particular Are there any Oil-Related companies that have been in your recommendations that I should consider exiting.

    Thank you in advance for your response and for all that your publication offers. I do rely on your advice heavily, so please let me know your thoughts.


    Patrick (

  6. Calvin Smith
    February 14th, 2011 at 16:36 | #6

    I have been warming to the idea of buying into Natural Gas producers as it seems the market dislikes the area currently. I like to buy into things when they are cheap but would like your thoughts on what price level would fine support. The price differencial between Natural Gas and Oil should drive transportation firms to convert to the use of Natural Gas. I am seeing local firms doing this. It should become a national trend.

  7. Shabbir Malbari
    February 14th, 2011 at 17:17 | #7

    Can you give me the names of the two u.s. companies of future “Biomas” fuel producers till year 2022.

  8. Carl Blackledge
    February 14th, 2011 at 17:27 | #8

    Dear Kent, I have a lease held by XTO in the Barnett Shale that expires next year .Do u think they will re-lease it or drill it? thanks, Carl

  9. g haber
    February 14th, 2011 at 18:16 | #9

    Bears Take Over the Natural Gas Market

    your criteria
    1.solid gross, operating, and net margins;
    2.a low (and declining) debt-to-earnings ratio; and
    3.central focus upon primary low-cost production assets.

    do you actually believe the average investor can evaluate a company that has these criteria without knowing what he or she should be using for a comparison . Get real !!!
    Give us data to be able to make that decision otherwise this is useless and speculative info .

  10. Gary
    February 14th, 2011 at 19:01 | #10

    Your article titled: “Bears Take Over the Natural Gas Market”

    A very generic article — with limited value for most any reader.

    Your did NOT mention any companies that meet your three criteria.
    Also, you did NOT mention any Exchange Traded Funds that would also be appropriate purchases.

    With hundreds of possible companies of ETF to purchase — — certainly a few excellent and profitable organizations could have been mentioned.

  11. G Dearringer
    February 14th, 2011 at 20:04 | #11

    I’m puzzled. This latest email was without advice on what to do as an investor following your advice. What companies meet the criteria? Sell or Buy which gas companies?

  12. Todd
    February 14th, 2011 at 20:35 | #12

    My family has been approached by a company to sign over mineral rights on land in SW PA. An energy company has made low ball offers. Can you discuss the steps landowner/mineral rights owners can take to ensure they are getting a fair deal for their mineral rights? Also can you discuss the relative value of the Utica Shale compared to the Marcellus Shale? Much appreciate your coments in the upcoming issues.

  13. Gary Lea
    February 14th, 2011 at 21:36 | #13

    I have to agree. The info without specific actionable reco’s is not helpful. I am a busy professional and do not have time to do the suggested research. That’s why I subscribe to the newsletter. I can, with respect, get similar info from many mainline nespapers or the Internet.

  14. David Friedlander
    February 14th, 2011 at 22:19 | #14

    You provide a lot of technical information with no direct advice on what to do about it. I have subscribed to your service for stock advice, what to buy, what to sell and you are not fulfilling your obligation for the service. It is your job to give direction.

  15. Bob Canada
    February 14th, 2011 at 22:45 | #15

    I’m only capable of buying or selling when I’m told to. Thats the ultimate discipline for me. Most investors don’t have that discipline. So please lets get going here.
    PS I took a long position on COP Friday.

  16. Alvin Ang
    February 15th, 2011 at 01:57 | #16

    Hi Dr. Moors,

    Thank you so much for your updates about the industry and constantly supplying good stock advice for us. The spread between the Nymex and Brent Crude Oil is getting larger and larger. The Brent Crude Oil is trending upwards but the Nymex is still looking at a downwards trend. I was wondering when will the turning point be to push Nymex above $150/barrel?

    Also, I rely on your insight and news a lot but I am primarily an options trader. I was wondering if you would advice us to buy options for your recommendations or only purchase stocks? Due to the volatility, options have not been doing so well. Please advise.

    Alvin Ang

  17. S comer
    February 15th, 2011 at 03:49 | #17

    another reason , and a growing one , is that shale gas , or Gaz de Schiste as they call it here in France , is extremely destructive of aquifers, and ergo LIFE, the method of using several 100 chemicals which are then blasted into the shall , hopefully , below the underground water, is pure roulette, and so far has a bad to worse scenario trailing it. here in Ardeche , there is uranium in the underground, hardly necessary to add radioactivity to water already destroyed for decades, but it surely won’t help, SO , here it will be a battle, may even go militant, and could result in , ie making it harder to find drivers for hauling thousands of liters of poisonous cocktail to the drill sites!, ergo , probably better to go with the new micro nukess, or even Bio- gas!, but the texans are out to create Armageddon, S

  18. Marc
    February 15th, 2011 at 10:05 | #18

    Well…all the above comments are mine exactly… The Gas outlook is still grim, but where’s the beef? Recommendations? I, too, have no desire to wait a year for something to move. Dead money is just that–Dead!

    Marc Prinz

  19. Robert Eastman
    February 15th, 2011 at 15:25 | #19

    Thank you for the overview of this market Kent!
    For all those complaining about not getting specific information/investment advice… grow-up! Is this not a FREE newsletter? Do you not realize that FREE newsletters are “marketing tools” for selling “paid advisory services?” Some of you folks seem to have the intelligence of 10 year olds!

  20. webb connelly
    February 15th, 2011 at 22:21 | #20

    I am real surprised you have not told investors about SPLM ( Sentry
    Petroleum Ltd.) IT HAS tremendous leases in Australia, surrounded
    by lots of large oil & gas corporations.

  21. February 17th, 2011 at 10:54 | #21

    This merger the door for local entrepreneurs to establish themselves in important niche markets. The newly combined company Iron..Mountain Records Management will have locations in more than 70 markets of this size ..mostly in the United States and Canada.

  22. Marc
    February 17th, 2011 at 12:07 | #22

    Ok, Kent, but what to do now? From your comments, it would appear that a Nat Gas investment is going to be “dead money”… How about
    stocks you would buy, or would you temporarilly stand aside?

  23. Frans
    February 17th, 2011 at 18:14 | #23

    To Eastman
    The Innercircle IS a paid service, these people have a legitimate complain and they are intelligent individuals stop calling them names, so grow up yourself

  24. rhelland
    February 18th, 2011 at 15:49 | #24

    I expect specific recommendations in addition to background info from you. Otherwise I might as well cancel my subscription.

  25. jim abraham
    February 20th, 2011 at 23:42 | #25

    same comment as above.please give a recommendation.

    April 11th, 2011 at 07:11 | #26

    Please give specific recommendations. Who should I buy in the Energy sector?
    Thank You.

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