Something's Not Right
Well, it's winter again here in Vermont. Believe it or not I awoke this morning to nearly a foot of the white stuff. And this isn't the light and fluffy kind of snow - it's the heavy, wet and destructive kind. Power is out in many areas, cars are off the road, and it looks like December. In short, winter isn't going quietly.
The fact that I had to turn my heat back on yesterday reminded me that the Energy Information Agency (EIA) is releasing a new report on natural gas supply in the United States. Natural gas is cheap, plentiful, and cleaner burning than heating oil, coal, and gasoline. Regardless of whether it is used for heat, vehicle propulsion, or to generate electricity, natural gas will have a place in the worlds energy mix in the future.
Yesterday I was speaking with Kevin McElroy, editor of the Resource Prospector Resource Prospector. We don't always agree, but we are both bullish on natural gas for a few reasons – it's cheap, plentiful and as green as fossil fuels get. As Kevin wrote yesterday:
"We'll use more, not less natural gas in the future because we're running out of easy-to-get crude oil. Natural gas prices would have to sextuple to reach the equivalent cost of gasoline today."
The EIA's report will use new methods to estimate supply, and there's reason to believe that these new methods will more accurately report that we have less immediate supply than was previously estimated.
It's certainly possible that natural gas prices could go lower, but not much lower. If you buy stock in solid natural gas stocks at today's prices, you're investing in the eventual reality that the world will use more natural gas, and that the price will head higher.
Take a look at the natural gas chart below:
It's possible that the EIA's report, which comes out this Friday, will give natural gas prices a boost. If it does, natural gas stocks should pop as well.
One of my favorite natural gas stocks is China Natural Gas (NASDAQ: CHNG), a stock that I hold in the Small Cap Investor PRO portfolio. This stock has been consolidating over the last couple of months, and like many China stocks has fallen from the late 2009 highs. But I believe that China will come back in 2010, and that the pause in the country's stock market is positive in the long-term. The combination of a market that has pulled-back, and a product that is selling near its lows, leads me to believe that now is a good time to pick up shares of China Natural Gas.
***Kevin and I are not the only ones saying that natural gas prices should rise. Henry Groppe, an oil man from Texas with over 50 years in the industry believes that natural gas prices could double by the end of the 2010. And Jim Rogers, one of the greatest commodity investors of all time is bullish on natural gas. What's more, Rogers is also bullish on China – although he is quick to point out that investors need to accept the risk of investing in the communist-capitalist country.
I've discussed the idiosyncrasies of investing in China at great length, and I like the way Rogers explains his perspective. In his book, Hot Commodities, Rogers explains the downside risk of investing in China:
"China is a fragile giant – at once emboldened by its economic growth and afraid of the consequences. Its top leaders are cautious…the Chinese government is learning how to live with its homegrown capitalism with trepidation. And while capitalists have been allowed to join the Party, there are plenty of die-hard Maoists who do not believe in the freedom to pursue profit and want to keep their business colleagues on a short leash. There are bound to be clashes of interests…and the rest of the world's economies will feel the pain."
The past few months we've felt some of the pain as China's market has pulled back. And the ongoing debate regarding the potentially 'bubblicious' economy rightfully has investors with one finger on the 'buy' button and one on the 'sell' button. But that's the way it goes when there are profits to be had – you just don't want to be the last one out the door.
Right now, I think there is still room to buy China stocks. In the Small Cap Investor PRO portfolio I hold a number of China stocks, and several have pulled back from 52-week highs. But if you believe, as I do, that these stocks will head higher in 2010, now could be a good time to start buying shares. And China Natural Gas is one worth keeping an eye on, especially with the EIA's report due out Friday.
You can cancel at any time, but I don't think you'll want to. I encourage you to try out the service and let me know what you think. My address is: editorial@smallcapinvestor.com.
