What’s up with the price of natural gas?

After the boondoggle of 2008-09, the prices of most commodities recovered. Oil is currently around $80 per barrel. Gold and silver are hitting record highs. Even sugar has been on a tear lately. With all that we’re hearing about clean energy, why hasn’t natural gas joined the party?

After hitting a high of close to $14 in 2008, the current spot price has dipped to below $4. If you factor in the increased value of the Canadian dollar, Canadian natural gas producers are selling their gas for less than ever. (unless they hedged) This chart of the natural gas etf is downright scary; I pity the poor buggers who bought this thing two years ago.

With the economy recovering, why is natural gas so cheap?

First of all, we’re awash with the stuff. Thanks to new technologies, getting natural gas out of the ground has become easier and cheaper. Therefore more is being produced and demand hasn’t been able to catch up, partially due to the general economic slowdown. Inventory numbers are up significantly compared to even 5 years ago.

The weather also plays a role in the price. Thanks to El Nino, North America’s last winter was warmer than usual. Warmer weather reduces demand for the commodity, since most homes in Canada and the northern U.S. are warmed by natural gas. If warmer weather persists into the summer, this will help the price of the commodity since many air conditioners use natural gas.

While people would like to see natural gas used to power things like cars, the reality is that we’re many years away from this having any sort of  impact on demand. In fact, many people think North America is lagging behind where they should be for these types of technologies.

Storing and transporting natural gas is much tougher than storing and transporting oil. Because of this, as we reach our storage capacity for gas, we simply have nowhere else to put it. Traders are concerned that with high inventory levels, running out of storage space for natural gas is a real possibility.

So is natural gas a buy now? Stay tuned, we’ll explore that possibility tomorrow.

Tell everyone, yo!