Thursday, 21 April 2016 00:00

Four Reasons To Be Bullish On Natural Gas

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Energy prices have been depressed in the last 12-18 months and I have maintained my view that this is a good opportunity to accumulate quality names in the energy sector for the next 5-10 years. This article discusses four important reasons to believe that natural gas is a good investment theme for the next decade. While near-term uncertainty and volatility might prevail, investors need to focus on the long-term and gradually accumulate stocks pertaining to the sector.

 

Reason One – Global Environmental Concerns

There is no debate on the point that global warming is a big concern and February 2016, which was the warmest month on record, does underscore the need to urgently address the problem of global warming.

The burning of different fuels for electricity consumption is one of the major sources of CO2 emission globally and electricity consumption will continue to increase (in all probability) with incremental demand from emerging Asia and Africa.

From the perspective of electricity generation from fuels and from the perspective of other applications of fuels, natural gas stands out as the lowest emitter of C02 per million British thermal units (Btu). The same is shown in the chart below.

 

CO2 Emitted Per Million BTU Of Energy For Various Fuels

 

Considering this factor, I believe that the demand for natural gas will increase globally and this will ensure that natural gas prices trend higher in the long-term.

 

Reason Two – Big Shift In The United States

The point that I mentioned above is already evident for the United States and the chart below best explains that trend.

 

Electricity Generation By Source In United States

 

Natural gas consumption as source of electricity generation has increased to 32% in 2015 from just 18% in 2005. In the coming years, this transformation is likely to continue and relatively low natural gas prices will accelerate this change in trend.

Even when natural gas prices surge higher, I don’t expect reversal in this trend as the factor of cleaner fuel will dominate.

 

Reason Three – Low Per Capita Consumption In China and India

US, which is home to 330 million people has a high per capita consumption of natural gas and this is likely to increase in the coming decade.

However, China and India are home to 2.5 billion people and per capita consumption of natural gas is still significantly low in these two countries as shown in the chart below.

 

Per Capita Natural Gas Consumption For US and World

 

If the per capital consumption for 2.5 billion people increases (very likely), the incremental demand for natural gas will be very significant and this will ensure that global prices remain firm.

 

Reason Four – Geo-Political Tensions

While I am not suggesting big wars in the Middle-East, geo-political tensions are likely to escalate in the coming years and I believe that this will have significant implications on natural gas prices.

As the chart below shows, Middle-East has 42.7% of proved natural gas reserves and I must add here that Iran has the largest reserves in the region. Sanctions for Iran might have come-off, but relations with Saudi Arabia remain bitter and the two countries have already engaged in proxy war(s).

 

Distribution Of Proved Reserves Of Natural Gas Globally

 

This factor can play an important role in the coming years and it is also important to add here that Russia is another big name in the natural gas industry. The recent friction between Russia and NATO is also unlikely to die down and will keep geo-political factors as an important reason for natural gas prices remaining firm in the next decade.

 

Conclusion

These factors will ensure that natural gas continues to trend higher in the coming decade and I believe that investors can consider exposure to quality stocks with high natural gas composition in their proved reserves along with exposure to LNG export themes. The topic of LNG exports from the United States requires a separate discussion and I will write on that in the foreseeable future. However, I must mention here that I had written earlier on GasLog (NYSE: GLOG) and I remain bullish on that stock for the next 5-years.

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1 comment

  • Comment Link Day Trader Friday, 22 April 2016 05:02 posted by Day Trader

    Good points. Thanks. I guess per capita consumption for oil is low for China and India. Can make a good case for oil upside in long term.

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