Tags: natural | gas | electricy | rally

Invest in Electricity to Take Advantage of the Natural Gas Rally

Friday, 30 Nov 2012 11:59 AM

By Michael Kling

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Investors betting that natural gas prices will increase might be wondering how to take advantage of the rally, despite a recent drop in natural gas futures prices due to mild weather.

Before the drop, natural gas prices exploded, nearly doubling from less than $2 per million British thermal units to about $3.70 since April, notes The Wall Street Journal.

Of course, there are exploration and production companies. But those companies, according to The Journal, have high operating costs, as finding and extracting gas and oil is costly, and they have to hedge or lock in future prices.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Also, exploration and production companies have begun producing more oil, which they can sell for a higher price, because of persistently low natural gas prices, according to The Journal. Unfortunately for these companies, the outlook for oil prices next year is weak.

Another option is the United States Natural Gas Fund. However, The Journal reports, the
fund has high costs from rolling positions forward as contracts expire.

A more rewarding avenue, according to The Journal is to invest in electricity, since natural gas is used to generate electricity. Unregulated electricity generators will benefit as natural gas prices increase, allowing them to increase electricity prices.

While electricity generators have to hedge, they don't have the high costs of exploration and production companies.

The down side is that higher gas prices could squeeze retail margins and increase costs of some power generators as they shift their mix of power plants.

Natural gas for January delivery fell 15.3 cents to settle at $3.648 per million British thermal units Thursday on the New York Mercantile Exchange after the Energy Department reported larger gas stockpiles due to mild weather reducing demand, according to Bloomberg.

The warm December that weather forecasters predict could squash natural gas demand further.

“December forecasts have turned warmer and there are no supply issues at all. This storage report could be the thing that breaks the market," Gordy Elliott, a risk management specialist at FC Stone LLC in St. Louis Park, Minn., told Bloomberg.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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