About two months from now, not long after the Fourth of July, the weather is going to turn hot in most parts of the United States. Real hot. So hot that you will not be able to think of anything except getting into a building -- a movie theater, a house, a mall -- that has the air conditioning on full blast. And then you won't want to leave.
That might be the moment when the speculator in you will wonder whether there's an investment angle. And the answer is that you should have been thinking about that in the spring. You know, like now.
So here's a quick beat-the-heat report on preparing for a summer power portfolio.
When you think air conditioning, you need to think electricity. And when you think electricity, think hydropower, coal and natural gas -- but mostly natural gas. Electric utilities are not the way to go, as they're under a lot of new regulatory pressure and the recession has sapped demand, both of which have clipped profitability and stifled earnings growth. Coal is a great and plentiful fuel, but it blackens the sky with soot and taints the rain with acid. As a result, a lot of communities are trying to ban its use in new plants.
That leaves you with troublesome, rowdy, enigmatic natural gas. It's not a second-best option, not at all: It can be a fantastic investment opportunity. But the problem is that it is amazingly volatile. It's like catching lightning in a jar. Natural-gas futures are the pork bellies of the energy world. They cycle through so many emotional highs and lows you would think they're bets on teenagers' mood swings.
The next few months will probably be a good time to put that energy to work for you, with individual stocks and commodity exchange-traded funds that I'll get to in a moment. But prepare to scram when the market turns cold, as it always does.
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A volatile gas
On a good day, you see, natural gas is celebrated as the most abundant fuel in North America, not to mention clean and exceptionally efficient at turning hydrocarbons into raw power. There is so much of it wafting through the crevices of underground formations in Appalachia, the Gulf of Mexico and the Rocky Mountains that sometimes it sells for next to nothing. But just threaten to stop the flow for a few days, and the price takes off like a baseball off the bat of Albert Pujols.At the depths of the last recession and bear market, in mid-2002, natural gas sold for a paltry $2 per million British thermal units, which was about $2 less than break-even. Producers were keeling over left and right. Prices skyrocketed seven times higher as the recovery picked up steam, cresting at $15.50 after Hurricane Katrina wiped out Gulf of Mexico production in 2005. They then turned around and plunged to $4.35 eight months later, blasted to $13.65 at the peak of the energy craze last summer and have since plummeted as low as $3.25 last month.
A few weeks ago, natural gas skipped back up to $4.35, and energy investors' hearts started racing. It sure looked like the start of one of the commodity's patented mad scrambles toward the moon.
Ooh baby, they thought. If natural gas could just get to around $6, where it started 2009, it could spark a rampage in the shares of the Texas, Oklahoma, Louisiana and North Dakota drillers that have fallen into a depression over the past year. Shares of a quintessential gas driller, Chesapeake Energy (CHK, news, msgs), plunged 85% from July to December 2008. They have just started to lift off the floor into the low $20s on hopes that green shoots of a stirring economy will turn into black gold for companies that produce the fuel that makes utilities hum.
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From ethanol boom to bustMarketWatch reporter Matt Andrejczak visits a California corn-ethanol plant that once represented hopes for biofuels but now stands for the industry's sudden stagnation. (May 14)
Yet this trade is not a slam-dunk, for experts say this is a transition time in the natural-gas market. Gas prices got so high last year that every driller with a few acres to spare leased rigs and put them to work. As always, at highs, people seemed to think the economy was going to rip upward forever and demand ever more fuel, pushing natural gas toward $15 per million Btu and beyond. By last June, the U.S. gas drilling rig count had surpassed 1,500 for the first time, and by October the count had hit 1,600.
What happened next was not quite what you might have expected. Confounding all those predictions, the economy tanked, natural-gas prices plunged, and the rig count crashed at the fastest rate in history, falling by more than half in just six months. (The previous record decline was 40% in a year, from April 2001 to April 2002.)
Defying economic gravity
But here's the kicker: Because natural-gas drillers have so many awesome new technologies that help them coax gas out of the ground -- and because they have so much sunk into production, transportation and storage facilities -- the actual amount of natural gas produced now isn’t below what it was a year ago. It's actually higher.This is a fact that absolutely terrifies the drillers and most natural-gas investors, as the market is so clearly oversupplied that it's not even funny. Think about it: You have the worst recession in decades sapping demand for energy, and the new president is trying to create an industry that is focused on alternatives to fossil fuels, and yet more fuel is being produced than at any time in history.
Continued: Why share prices aren't unraveling
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