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Factors to Consider when Investing in Natural Gas | Russell T. Rudy Energy LLC

A recent article in “Rigzone” featured six factors natural gas investors often ignore or do not completely understand. I have summarized them below and added my own comments.

• The Role that Coal Plays in Natural Gas Demand-Currently the federal government is antagonistic toward coal. This has been advantageous for natural gas. In 2012 coal fired power generation capacity in the U. S. totaled 310 gigawatts. However, the Energy Information Agency predicts that by the end of the decade, 60 gigawatts of capacity will be retired.
• Comment: While this sounds like good news for natural gas, the next administration might be more supportive of coal. While the government can influence markets, it cannot totally control them.

• Hidden Reserves-There are plenty of natural gas reserves in this country that are not currently being utilized.
• Comment: While this can be seen volumetrically as an upside, this is not necessarily the case as far as price is concerned. Whenever demand starts to push prices upward, ready reserves can come to market and keep prices from rising significantly.

• Effects of Weather-Harsh winters can increase the demand, and consequently the price, in the short term, but the opposite can be said about mild winters. Either way these impacts are often short-lived.
• Comment: Don’t make long term decisions based on short term phenomena.

• Complexity of Natural Gas Futures Markets-Don’t be swayed by the apparent quick and easy money to be made betting on futures contracts. The futures market is highly speculative and can change instantly. Unless you have a high tolerance for anxiety and deep pockets, avoid futures.
• Comment: In the futures market you are not only betting on the price to move in a certain direction by at least a certain amount, but you are also betting it will do so within a limited time frame. Lots of risk here.

• Investment Alternative-Investors have a wide range of investment options. Exchange Traded Funds, futures contracts, distribution companies, gas utilities, stock in exploration and production companies with significant gas reserves, are all available.   Do the necessary research and choose the one that is right for you.
• Comment: All investments involve a trade-off between profitability and risk. Everyone wants maximum profit and minimum risk. However, in the real world, that is not possible. Everyone has a different risk tolerance and capacity to absorb losses. Just remember the oft-quoted Wall Street saying; “Bulls make money, bears make money, but pigs get slaughtered.”

To read the article in its entirety, please go to

www.rigzone.com/news/oil_gas/a/135565/6_Mistakes .