Too early to declare victory... Bernanke's heavy-handed hint... The one asset Bernanke can't inflate... Buy a Volkswagen...
"It's far too early to declare victory," Federal Reserve Chairman Ben Bernanke told Diane Sawyer in an interview with ABC News. "The recent news has been good. But I think we need to be cautious and make sure this is sustainable. And we haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery."
Remember Bernanke's speech from two days ago? He said the drop in the unemployment rate is encouraging. But he thinks further improvements in the jobless rate will require expanding production and consumer demand. And how does a central banker expand production and consumer demand? He prints money. Or as Bernanke put it… he enacts "continued accommodative policies."
The one asset whose value Bernanke's money printing can't seem to prop up is natural gas... Yesterday, natural gas prices fell 2.2% on the day to hit a new 10-year low of $2.176 per million British thermal units (mmBtu). That's below the previous 10-year low of $2.204 mmBtu set earlier this month. With Brent crude (the international barometer for oil prices) near $125 a barrel, the oil-to-natural gas ratio is at a new high of 57.
Think of it this way… It takes about 5.8 mmBtu of natural gas to produce the equivalent energy of one barrel of oil. So if you multiple today's price of $2.18 per mmBtu by 5.8, you get $12.64. Natural gas is 90% cheaper than Brent crude (which trades at $125 a barrel). That's the biggest discount in history.
We've discussed the reasons behind the historic low natural gas prices… Briefly, the advent of new drilling technologies (notably horizontal drilling and hydraulic fracturing, or "fracking") have allowed exploration companies to tap stores of gas that were previously impossible to exploit economically. And that has created an immense glut in natural gas supplies.
As more and more natural gas comes online, prices fall further and further. Why don't drillers simply cut back on production until prices rise? Super-successful resource investor Rick Rule recently explained the reason in an interview with Phase 1 Investor and Small Stock Specialist editor Frank Curzio (on Frank's S&A Investor Radio podcast): Energy companies pay most of the costs of drilling wells up front. Since the costs are sunk, the producers will do anything they can to recoup costs, including drilling for natural gas at record-low prices.
Consider this bit from a March 12 Forbes piece…
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Despite low natural gas prices, Chevron looks intent on pushing into the natural gas market in the U.S. The company plans to double its drilling in the Marcellus play this year while also drilling a few exploration wells in the Utica play despite gas prices touching their lowest point in a decade, making shale exploration less profitable. Chevron's decision to press on with shale exploration mirrors that of rival Exxon Mobil, which has decided against production cuts. |
Just how much natural gas do we have in the U.S.? According to Steve Farris, CEO of natural gas company Apache, we have at least a 300-year supply of natural gas.
Porter discussed the natural gas glut in the November 2011 issue of Stansberry's Investment Advisory. He said the current market action in gas could be "the single biggest anomaly" he's seen in his entire career…
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We are seeing the first trickle of oil from these [shale] fields, where drilling is now going on night and day. Tens of thousands of new wells will be drilled over the next decade. The amount of new oil that will be produced can't even yet be imagined. Trust me on this... every projection you'll see over the next 12-24 months about the amount of future production will end up being woefully, laughably conservative. |
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The amount of oil and gas that will be produced from U.S. shale plays over the next decade cannot even be imagined today. My bet is U.S. production at least triples over the next 10 years. |
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How do I know? Because that's what always happens with oil discoveries. Somewhere out there an elephant is hiding in the shale. Who knows who will find it... but if we drill enough holes out there, someone will. Consider this, one small example... |
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This week, Anadarko announced it had discovered what it believes will be a 1 billion-2 billion barrel resource in the Niobrara shale that sits under the Wattenberg field in northeast Colorado. That's the largest new discovery in the U.S. in more than 40 years. Anadarko drilled 11 horizontal wells to make this discovery. Next year, it will drill 160 more. And in the future, it will drill 1,200-2,700 horizontal wells in the Wattenberg field. My bet is, the resource estimate continues to get bigger. |
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Now, consider this. The Wattenberg field has been in production since 1901. Yes, that's correct. It's not a typo. The field has already produced 4 trillion cubic feet of natural gas and hosts 14,000 wells. In 2007, it produced 11 million barrels of oil. |
The boom in natural gas supplies is a fundamental change in the market, and natural gas prices could hover around these levels for years. But eventually, prices should rebound... Natural gas is energy. And as energy prices drop, the more people start to use it. As Porter explained in his most recent issue, "There's simply no such thing as a permanent glut of energy."
Even with record-low natural gas prices, one group of companies in the sector is enjoying rising share prices – the companies helping to convert our nation's transportation system from diesel and gasoline to natural gas…
Frank Curzio has been covering the situation in his Small Stock Specialist newsletter. Frank believes natural gas' low price and abundance will make it a more attractive fuel than traditional gasoline for automobiles. And the U.S. will spend billions of dollars building natural gas-fueling stations. (The U.S. has only 1,000 today.) The companies involved in this trend will soar as the major auto manufacturers start producing more natural-gas powered cars.
Frank has prepared a special report describing the megatrend and his favorite companies to benefit from it. To learn about a subscription to Small Stock Specialist – and how to get a copy of his natural gas report – click here.
New 52-week highs (as of 3/27/12): ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), Abbott Labs (ABT), Cisco (CSCO), and Tetra Tech (TTEK).
In today's mailbag, a novel way to cure Porter's back problems... Buy a Volkswagen. Send your e-mails to feedback@stansberryresearch.com.
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"30-plus years ago, I had a back problem caused by slouching on couch while watching a very bad Bear game. Caused me to give up golf. This was in the Carter gas crisis era. I purchased a diesel Volkswagen Rabbit. Wonderful car, got 51 miles to the galleon and put 250,000-plus miles on it with no problems.
"I worked out of my back problem by commuting to work (1 hour) with the back of the seat ratcheted forward, pushing me over the steering wheel. The diesel gave a lot of vibration and my back felt better after each trip. The problem kept improving and eventually vanished.
"One of my customers had a similar problem, but said the seat on his Mercedes would not come forward like the VW. He worked in a big… office chair that had to be killing his back.
"Now I am 77, have a slight back problem again but no VW. Got some chairs that force me to sit upright, no slouching." – Paid-up subscriber Alfred Killian
Regards,
Sean Goldsmith
Baltimore, Maryland
March 28, 2012