Natural Gas Prices are setting new lows almost every week – and everyone expects them to continue lower for some time.  But natural gas stocks are going up. 

Investors clearly believe that the collapse in the number of rigs searching for oil and gas is going to mean a sharp reduction in gas supply sometime in the coming months, causing gas prices to rebound.  Consensus from many analyst reports I have read suggest that won’t happen until Oct-Nov this year, but all are recommending to their investors to begin positioning themselves now.   

And the charts on the natural gas stocks say investors are listening.

Stocks do lead fundamentals by 6-9 months.  And the many reports that I read are telling investors that when natural gas prices turn up (due to either much lower gas injections into storage in the summer or much larger net withdrawals from storage starting in October) it will be a very fast move up.

It’s only April, but I can almost smell the pent up demand from the market waiting for that first really bullish gas inventory number.  And that’s what makes me think this gas market could stay lower for longer than most people think – but the rise in natural gas stocks says otherwise.

How low are gas prices now? Most investors surfing the web only see the price for the NYMEX hub out of New York, and a few see the Henry Hub price out of Louisiana.  But there are about 14 natural gas hubs in the US – and many of the Midwest hubs now have prices around US$2/mcf, and I saw one price at US$1.44.  By contrast, NYMEX yesterday was US$3.69.  And almost everyone agrees (I can’t find one dissenting opinion) that natural gas prices will go lower throughout the summer.

Both institutional and retail investors are looking past the huge natural gas storage levels in both the US and Canada, the looming threat of large LNG (liquid natural gas) shipments being dumped into the US this summer looking for either storage or sale at any price, low customer demand due to recession and the large amounts of shale gas being discovered in North America. 

Natural gas bulls can refute any and all of these points, but the main point is…nobody really knows the future.  But in bidding up natural gas stocks these early, investors are taking the falling rig counts as their most important factor.

First Energy Capital of Calgary estimates the US needs to have 1230 drill rigs working to sustain production.  Last year there were 1400-1600 active gas rigs, this year there is just under 800.  However, more of these rigs – 40% now – are horizontal rigs that greatly increase production compared to vertical wells.  The number of horizontal rigs is not down as much, and drilling in the prolific Haynesville and Marcellus shales is continuing.  Gas production in the US is down slightly over 2008 – but last year was a record high year.

In Canada, there were 83 total rigs working last week, down 29 from the same week last year. 67% of the rigs in Canada drill for gas, on average.  I could not find any statistic to say how many rigs are needed to keep Canadian gas production constant.

How low will the rig count go? How low will the subsequent drop in supply be? When will that start to show up in reduced inventories or large withdrawals?

For investors buying natural gas stocks now, only time will tell if the early bird gets to eat the worm, or choke on it.