Hot enough for ya? Type “summer heat wave” into Google news and you’re going to get pages and pages of reports of heat waves across the country that are melting long-standing records.
Adding to the problem: So many sweltering citizens are cranking up their air conditioners that whole power grids are sputtering, plunging people into sweltering blackness. Just a few examples:
- In New York, residents of Queens are facing their second week without power.
- California is careening into a power emergency, with rolling blackouts compounded by raging forest fires.
- Phoenix has turned into the worlds’ biggest EZ-Bake Oven — 114 degrees in the shade! That’s a new record.
- In St. Louis, the damage from a killer summer storm has been compounded by a blackout — a quarter million homes have lost power.
The federal government recently reported that the first half of 2006 was the warmest in the U.S. since record keeping began in 1895. The average temperature for the 48 contiguous states from January through June was 51.8°F. That’s 3.4°F above the 20th Century average.
The trend in weather is getting ugly. So far, 28 people have died because of this year’s heat wave in the U.S.
And it’s not just us — Europe is roasting like a marshmallow over burning coals. More than 30 people have died there from the heat.
So, while you’re sweating away in a rolling brownout, is there a way to make lemons into refreshing summer lemonade? Heck, yeah … by investing in natural gas! It’s the summer sleeper.
Short-Term Oversupply
Last week, natural gas stockpiles reached 2.763 trillion cubic feet. That’s 18% higher than a year ago and 26% higher than the five-year average.
This temporary oversupply has helped send natural gas prices tumbling. Just look at the chart — the price of natural gas is scraping bottom. It’s down around levels not seen since 2004. And some analysts say that it could fall to $5.
My response: Don’t hold your breath. Fundamental forces are poised to send natural gas prices — and long-neglected natural gas stocks — much higher …
Force #1: The Summer Sizzle!
Many people think of natural gas as a “winter fuel” because more than half the homes in the U.S., especially in the Northeast, use it for heat.
But natural gas also provides about one-fifth of the power used to generate electricity in this country.
In other words, when Americans switch on their air conditioners, there’s a one-in-five chance they’re ultimately using natural gas.
Think about how much Americans are using the air conditioning in the scorching summer heat we’re suffering right now. This is bound to cause demand at natural-gas-fueled power plants to surge.
Force #2: Rigs Leaving the Gulf of Mexico
The longer-term outlook for natural gas is even more bullish. That’s because oil rigs are leaving the Gulf of Mexico for the quieter waters and higher-paying jobs off the coast of Africa and in the Persian Gulf.
According to a recent Wall Street Journal report, about 148 rigs were in the Gulf in 2001. Now, about 90 remain, and more are expected to leave soon.
For example, GlobalSantaFe Corp. is sending four jack-up rigs to a four-year stint in the Persian Gulf, where the Saudis will pay more than $160,000 a day per rig to drill for oil and gas. You think that’s high? Contracts for the larger deep-water rigs are over $500,000 a day!
Natural gas is mostly a local market. It has to be liquefied to be transported by ship — not easy and potentially risky. And just try to get your town to put in a liquefied natural gas port in these days of terror attacks and lawsuits!
Plus, natural gas reservoirs are often quickly exhausted, so energy companies must keep drilling new wells to maintain production. With drilling rigs leaving the Gulf, that won’t be easy.
Force #3: Hurricane Season
After last year’s sturm-und-drang, this year’s hurricane season seems remarkably tame — only two tropical storms so far and no named hurricanes.
Well, don’t get too comfortable. The National Oceanic and Atmospheric Administration (NOAA) has forecast 10 hurricanes for this year. The seasonal average is six, while last year we suffered through 15. And the water in the Gulf of Mexico is warmer than it was this time last year.
So what’s keeping a lid on things? Wind shear is sitting over the Gulf of Mexico, preventing tropical storms from blowing up into killer hurricanes. But our luck can’t hold forever. Experts forecast that the wind shear will calm down, and then the hurricanes will pick up.
Two other interesting factoids:
- First, the average number of Category 4 and Category 5 hurricanes worldwide has nearly doubled over the past 35 years, according to researchers at the Georgia Institute of Technology and the National Center for Atmospheric Research (NCAR). Category 4 hurricanes have sustained winds of 131-155 miles per hour; Category 5 systems, such as Hurricane Katrina at its peak over the Gulf of Mexico, have winds greater than 155.
- Speaking of Katrina, and its sister-from-Hell Rita, last year’s hurricanes wreaked havoc on the oil and gas fields in the Gulf of Mexico (GOM). As of June 19, a cumulative 22% of annual natural gas production in the Gulf was “shut in” or not available due to the storms. And over 9% of GOM natural gas production is still unavailable. It’s probably never coming back.
Remember, another severe storm season could hammer the rigs in the Gulf of Mexico again.
Don’t let the quiet start fool you. The real hurricane season doesn’t even start until July … and it doesn’t get really bad until September.
In this way, “summer” turns out to be longer and hotter than most people realize.
Does it sound like I’m rooting for hurricanes? I’m not … I live in Florida!
But I’ve already protected my house as well as I can. Now, it’s time to protect my portfolio. And I recommend you do the same.
Consider These Steps
First, there’s no such thing as a sure bet in any market. The only way you can guarantee a return is with money markets. And short-term Treasury bills or equivalent money funds are the safest.
Second, the fat profits of the oil-and-gas majors are bound to get still fatter. So I don’t think you can go wrong with the Energy Select SPDR (XLE).
Third, check out U.S. Global Investors Global Resources (PSPFX). This fund rotates to the natural resource sector it thinks is hot — precious metals, base metals, oil, gas, you name it. It has returned 54% over three years and 35% over one year. In the past three months, the pullback in energy stocks has hurt the fund — it’s down 12.9%. I’d say that’s a golden opportunity to get in on the cheap.
This no-load fund has a low total expense ratio of 1.3% and carries a four-star Morningstar rating.
Fourth, there’s nothing wrong with old favorites like the Enerplus Resources Fund (ERF). This is a Canadian royalty trust with nearly 3,000 natural gas wells and 2,000 oil wells. What’s more, Enerplus yields 8.3%.
Fifth, I recently recommended two small-cap energy stocks in my Red-Hot Canadian Small-Caps. I may have been a little early, but I don’t think I’m wrong. Not with the kind of moves we saw on Monday.
One of these stocks is an oil sands play; the other is an oil-and-gas explorer and producer with resource-rich properties. We were able to pick both of them up dirt-cheap compared to the value of their reserves. That’s because the market is still in the mindset of $45 oil and $5 natural gas.
However, the market will come around. Before that happens, I’ll add more undervalued companies. I recommend you do the same, or check out some funds that will ride the energy sector’s tidal wave of price appreciation.
Yours for trading profits,
Sean
P.S. Remember to check out my blog at redhotresources.blogspot.com
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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