Big Opportunities in Natural Gas

07/29/2011 3:30 pm EST

Focus: COMMODITIES

Daniel Gramza

President, Gramza Capital Management, Inc.

Oil may get all the headlines, but natural gas also offers excellent trading opportunities, and Dan Gramza discusses the fundamental drivers and provides an outlook for the rest of 2011.

When it comes to the energy markets, it seems that oil gets all of the attention, but natural gas is offering some interesting opportunities as well. Our guest today is Dan Gramza, here to talk about that.

So, Dan, talk about natural gas. Why don’t retail traders trade enough of it, and what are the opportunities?

Well, I think the opportunity for us right now is that we’re going to see a range-bound market through the end of the year between $4 and $5. Now, that’s still a pretty healthy move in that market, but we’re not going to see the extremes that people look for that they haven’t seen in the past. 

You’re also right; crude oil does get most of the attention. But natural gas is a product that we’re going to hear a lot more about going into the future. 

We’re going to hear a lot more about it because we have enough natural gas in the United States to meet our energy demand for the next 100 to 120 years. That’s the estimate. 

The issue that we have is the distribution of it. You know, we’re seeing reorganization of it. 

If we look in some parts of the Midwest, they’re actually building filling stations for natural gas. Honda is putting into production natural gas cars.

If you look at Canada, and if you look at our friends in Australia, you jump in a taxi, you’re going to see a tank in there. That’s for the natural gas. 

So, I think the opportunities long term are going to be terrific, but we have tremendous supply because of new technology that we’ve implemented to extract gas out of the ground. So, our discoveries have gone up tremendously. 

I think we all know that when you’re looking at oil prices, you’re looking at the Middle East and news events around that. What should I be looking at fundamentally for natural gas? What has the most impact on prices?

There are a couple things, actually. From an industry point of view, they look at the number of drilling rigs that are out there; the demand on gas drilling rigs. 

Now, for example, that was so high. A year ago, if you and I were sitting here, that was at the peak. The demand for those rigs was incredible. They were popping in those wells as fast as they could. That has slowed down, which says something about supply. 

But, let’s say for someone who’s observing this market, here’s a couple things you want to think about.

Usually, natural gas people think about their stove, heating their food, and things like that, or heating their home. The Northeast part of the United States uses heating oil. The rest of the United States uses natural gas.  That represents about 30% of the consumption of natural gas.

Here are the other things that we should be sensitive to. One, natural gas is used in the generation of power; about 35% of natural gas is used in the generation of power.

So, if we have a very, very hot summer, natural gas consumption is going to go up. In fact, some of the moves that we’ve had recently over the last few weeks have been caused by that belief we’re going to see an increase in demand because of weather.

The second thing I think we should be sensitive to is where they also use natural gas. About 35% is used in industrial production.

In steel making, chemical making, they’re large consumers of natural gas. So, if our economy is doing well, if we’re building, if we’re making things happen, natural gas consumption industrially should also go up. 

It’s an indirect barometer of our economy. The thing about it is because we have so much supply, that’s why I don’t think we have the ability to get beyond $5, but we’ve got plenty of opportunity here to look at.

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