The ugly bear market in natural gas may be about to end, in our opinion. The nuclear crisis in Japan will force policymakers to look for alternative energy sources for electricity generation and natural gas is set up perfectly.
Natural gas is cheap relative to crude oil and trades for about $3.90 per 1 MM British Thermal Units (BTUs). A barrel of crude oil, for example, consists of 5.6 M BTUs and at $115 per bbl trades at $20.50 per 1 M BTUs.
The BTU equivalent price for a barrel of crude should therefore be $20.50 per bbl, excluding the issues of transportation and other factors. The fact gas is difficult to transport excludes it from the “China is buying everything” story making it an anathema to speculators and hedge funds.
The following charts compare the evolution of France and Italy’s electricity generation by fuel type. Much of this depends on access to the fuel type, but the path of the two countries couldn’t be more different. France has moved to an almost total dependence on nuclear versus Italy’s move to gas as a primary source for electricity generation. Though Italy imports electricity and France is in surplus, we believe the markets will now adjust and focus on the Italy approach and use natural gas a bridge fuel while renewable energy sources continue to development.
(click here if charts are not observable)