While everyone is getting increasingly worried about the price of oil, there is one commodity that has been falling to decade lows: natural gas. With the recent developments in theU.S. of “fracking” and other technologies that can better extract natural gas, theU.S. has one of the largest amounts of reserves in the world. This great news can also be seen as bad news, if you’re selling natural gas since this newfound supply is causing a glut on the market.
As an investor, the investment strategy when a commodity is seeing excess supply and lower prices, like natural gas is, is to find out what companies benefit and end up with better corporate earnings. There are several ways to look at this investment strategy, including the conversion of vehicles to be powered by natural gas. Both Chrysler Group LLC (part of Fiat SpA) and General Motors Corporation (NYSE/GM) have announced pick-up trucks to be built that are powered exclusively by natural gas.
This investment strategy works two-fold. The companies that are first to embrace natural gas power in vehicles will gain an edge in the market, as demand is ramping up, which will help corporate earnings on the margin in that segment. And the companies buying these vehicles will incur lower operating costs, because natural gas is so much cheaper than regular gasoline, which will improve their corporate earnings.
Currently, the difference per gallon between regular gas and natural gas is approximately $1.50-$2.00 a gallon, depending on where you live, with the horsepower and fuel mileage the same. There are also some reports that natural-gas-powered engines cause less wear and tear than a regular engine. This will also lower long-term costs and help improve corporate earnings of those firms running a fleet of these natural gas trucks.
But this conversion to natural gas engines isn’t just for pick-up trucks, but also big trucks. Navistar International Corporation (NYSE/NAV) has announced that it’s going to start producing long-haul heavy-duty trucks to be powered by natural gas. You can well imagine the cost savings of truckers who burn thousands of gallons per year and the benefit to their corporate earnings by using natural gas instead of diesel.
A lot of firms that ship goods are looking into natural gas, to improve their corporate earnings. United Parcel Service Inc. (NYSE/UPS) currently has a fleet of approximately 1,000 trucks using natural gas, while FedEx Corporation (NYSE/FDX) is still conducting more research.
One issue that UPS has raised, among others, is the lack of natural gas filling stations. This is a subject that is gaining more attention and President Obama has stated that he thinks natural gas is a good idea for theU.S.However, we need more incentives for natural gas stations to be built all across theU.S.As more firms look to increase their corporate earnings, you can believe they will put pressure on their local congressman to do as much as possible to develop the natural gas infrastructure necessary for full deployment of this fuel source.
Chart courtesy of www.StockCharts.com
As seen in this chart, anytime the natural gas price has started to move up, it has met with a heavy supply of sellers. At some point, the market will move up, as markets cannot stay this far away from the 200-day moving average without at least attempting to close the gap. But any move up will be relatively minor compared to the price of oil. With the massive supply available to firms in the U.S., any substantial move will cause an expansion of drilling, and this new supply will hit the market. This is a situation where it will be tough to make money as a natural gas supplier. But these low prices will help corporate earnings of firms that use natural gas.