Are You Prepared for the Next Commodity Boom?
By Sasha Cekerevac for Investment Contrarians |
The recent pullback in many commodities has caused most investors to worry that perhaps the boom in commodities is over. Because of austerity and fiscal tightening around the world, countries and companies are reducing the amount of money they’re spending, which is much like the behavior of a consumer who has run out of credit and is consequently reducing his or her spending.
This will certainly have a negative impact on the commodities super cycle we’ve seen over the past decade. However, there is an investment opportunity that can benefit both the U.S. and Canada, and that opportunity is in the natural gas market sector.
Remember, when making an investment, one must understand what the advantage is for a market sector. Both the U.S. and Canada have a massive amount of natural gas in comparison to the rest of the world—that is our competitive edge.
This is providing a huge investment opportunity over the long term for the natural gas market sector. Both the potential to export natural gas and the ability of companies to use natural gas as an input will create a massive investment opportunity relative to other markets in the world.
Chart courtesy of www.StockCharts.com
Spot prices for natural gas have certainly rebounded from the lows of 2012, yet the commodity trades at a fraction of the price on the international market. Spot markets for natural gas in Asia can be four to five times higher than those in America.
Additionally, over the next decade, there will be increased demand for natural gas globally, as it is a cleaner fuel alternative to other possibilities, such as coal. With countries like China trying to reduce pollution, this certainly seems like a strong long-term investment opportunity for the natural gas market sector in America.
However, to maximize the potential of this investment opportunity, America needs to begin exporting natural gas. As long as America prevents this commodity’s export, any market sector that uses natural gas as an input will benefit, because domestic prices will be far lower than international levels.
If America does change its regulations and begins to allow for the export of natural gas to the global marketplace, this will be an extremely strong investment opportunity, because the arbitrage between international markets is huge.
The liquid natural gas market in Asia is set to increase by 83% between 2010 and 2020, compared to the U.S. domestic gas demand that is set to increase by only 11% during the same time period, according to a special report by the Financial Post. (Source: Waterous, A., “Canada could rival Qatar in LNG exports,” Financial Post, April 16, 2013, last accessed April 17, 2013.)
If the U.S. doesn’t take advantage of the global market demand, other countries, such as Canada, might step in and profit from this long-term investment opportunity. While some people might say that only the companies in the natural gas market sector will benefit from the investment opportunity gained from exporting the commodity, the obvious answer is that if you have good reason to believe a company is going to earn a lot of money, then you should invest in its stocks. Why would someone invest in a company that will lose money?
For specific commodity traders, I believe that over the next couple of decades the natural gas market sector will outperform many other commodities if the U.S. allows the export of liquid natural gas. This would significantly increase the domestic price of this commodity, allowing investors in the natural gas market sector to profit substantially.
It is clear that demand will continue to increase globally for natural gas, and domestic prices are far below global levels. The question is: will the administration open the door to this investment opportunity? Only time will tell.
Until that point, firms using natural gas as an input, such as chemical firms and many manufacturing companies, will continue to benefit from using the investment opportunity of having extremely low input costs. This could change substantially if firms within the natural gas market sector are allowed to take advantage of the huge arbitrage investment opportunity currently available. Over the long term, I think natural gas prices are set to continue rising.