The Cassandra of Natural Gas

While I am bullish on natural gas prices in the medium and long terms, the short-term surplus is huge. The U.S. Energy Department reported that stockpiles are 32% higher than a year ago.

But let’s keep a few factors in mind …

Where are we getting all that gas? Canada. Canada’s National Energy Board reports that gas shipments to the U.S. from Canada climbed by 4.3% in 2005 to 3.3 trillion cubic feet, up from 3.2 trillion in 2004. But Canada is using more and more of its natural gas to get oil out of tar sands. It takes 1,000 cubic feet of gas to convert a barrel of bitumen into light crude, according to George Crookshank, chief financial officer of OPTI Canada Inc.

As I have said before, that means we’re using one of our cleanest burning fuels to make one of our dirtiest burning fuels. And the ROEI (return on energy investment) is pathetic. Source for this chart is here.

It’s a good thing Canada is able to send us more natural gas, because production in the Gulf of Mexico dropped by close to 3% last year due to hurricane damage. And go ahead and call me Cassandra, but hurricane season is right around the corner, and this one is supposed to be a doozy.

Our long-term natural gas demand is climbing – up about 7% since 2000. Meanwhile, demand in the U.S. Midwest and Northeast are up 6% and 16% respectively in the last year.

Still, you can’t argue with the fact that mild weather and a surplus in storage point the way south for prices in the short term. I do expect another dip – maybe a sizeable dip -- in natural gas prices. And I think that’s the dip worth buying. That’s my game plan for Red-Hot Canadian Small-Caps. Now as to what stocks you buy to play the potential rally … hmm.

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