Natural Gas Prices and Stock Valuations

The gas industry is really dependent on the prices of the commodity itself.  This is especially true for upstream companies that do the exploration, drilling and production of this fossil fuel.  That is why if you are investing in any natural gas ETF funds or individual stocks, you need to be watching the commodities market for price volatility.

There are a few things happening right now that could make or break any of the natural gas companies in this sector.  Most of it has to do with the commodity prices.  I would say that until the price settles into a comfortable range, good stocks to invest in for this sector are those diversified in oil as well.

Gas prices are pretty cheap right now.  The main driver is supply.  A new drilling method called hydro-fracturing is allowing a dramatic increase in production of domestic supply.  That has been driving the prices down for some time.

The problem may be that this new drilling technique is very expensive.  That may also mean that with gas prices down, margins may be very small.

There is no doubt in my mind that this is going to change.  I believe the demand for natural gas is going to continue to rise.  As more and more power generation seeks to use this fuel that is cleaner than coal and safer than nuclear, I think prices will start to rise.

There is a movement to start using gas more than crude oil as well.  The main reasons are because it is cleaner burning and it can be found domestically.  That means we can clean up the air, mitigate climate change and get ourselves off of dependence on foreign oil all at the same time.

I think this migration to gas will continue for years to come.  That will lead to higher prices, which will help this sector.  But until that happens, many companies in this industry are at risk of not surviving the low margins.

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