This is one of the “bridge” commodities. Between the present, powered by coal and oil, and the future powered by clean energy, there are “bridge” power sources you have natural gas.
It is cleaner than oil, which dominated the 20th century, but it is not as environmentally friendly as hydro or solar sources.
However, the setup right now is great for natural gas.
Over the past year, its price has more than doubled.
But there’s more upside coming, in our opinion.
Let us explain…
Soaring Demand While Supply Isn’t Catching Up
This summer, natural gas prices have reached multi-year highs. The last time prices like these were recorded was in 2014.
Why is the demand soaring? Well, usually, natural gas is used for heating. But this summer, as quite a few places in the US experienced record temperatures, natural gas was used to generate electricity used for cooling.
In other words, it appears that natural gas prices could rise in both extreme cases: extreme heat and extreme cold.
Wall Street Journal reports that in the US, producers aren’t rushing to increase their output.
Because as demand remains high and supply stays constrained, the price has nowhere to go but up.
So if this reminds you of another group of commodity producers that like to control prices, you’re not wrong.
OPEC, the Organization of the Petroleum Exporting Countries, does the same thing.
It tries to control supply to ensure maximum profits.
A similar thing is happening in the gas market.
The producers aren’t increasing output.
The demand is surging… both in the US and across the world.
In fact, the world could be facing a gas shortage. And we’re going into the heating season.
Wall Street analysts estimate that natural gas inventories are too low.
In other words, the world is not prepared for this winter.
Which means that gas prices could rise significantly over the next several months.
Natural Gas Is Replacing Coal
Another reason why natural gas prices are going up is that it is used more widely as a replacement for one of the dirtiest commodities out there: coal.
Since 2011, over 100 coal-based power plants in the US were replaced or converted to natural gas, the country’s Energy Information Administration says.
And the country’s energy agency says that it expects more conversions like these to take place in the future, especially in Midwest and Southeast.
As the US, along with the rest of the world, is moving toward a greener future, natural gas price is also going up almost everywhere.
An analyst at the Toronto-based company information services company Price Street Inc. said that the way this coordinated natural gas bull market is happening is “extremely rare.”
Publicly listed companies are also enjoying this windfall, and, in our opinion, it is likely to continue.
For example, Birchcliff Energy Ltd, a Calgary-based company, has seen its net loss reverse and turn into positive net income on these developments.
Now, this is not a recommendation of Birchcliff. Instead, we’re using this example to show you how a company can be leveraged to the price of the underlying commodity.
This is called “leverage,” and we see it in most commodity sectors.
How Long Will This Bull Market Last?
There’s a good chance, in our opinion, that this “hot” environment could persist until the end of the year or into early 2022.
The reason we think so is that natural gas producers, as we said in the beginning, aren’t rushing to produce more natural gas to quelch the soaring demand.
So as they keep waiting, the price could stay elevated.
And the global demand for natural gas could continue increasing as late as the 2030s. Then, as the world moves on to cleaner energy sources, it could go down.
Investors would do well to put some of the most popular and liquid natural gas ETFs on their watchlist.
For an ETF that tracks the price of the commodity itself, an ETF such as United States Natural Gas Fund (UNG) is a good option.
We like this “bridge” commodity because it provides another “clean” investment opportunity in a very hot and growing market.
So until the whole world has turned green and clean, considering natural gas investment could be a smart thing to do.
Thank you for your loyal readership,
The Financial Star team