David Sterman
If you were in a room of investors this past spring and told them that natural gas prices would soon stage a stunning rebound, then you would have been laughed out of the room. After all, the country was facing a major gas glut that within just a few months threatened to fill up our nation's energy storage system completely.

Of further concern back then: though the number of gas rigs in service had been steadily falling, the remaining rigs that were still in use were pumping out much more natural gas than geologists had assumed. Yet thanks to rising demand for gas, especially at power plants that switch from coal to gas (C2G), prices indeed firmed up -- spectacularly so.

But unfortunately, investors' minds are still stuck in the past. The press is filled with reports calling for a big pullback in natural gas. They cite technical factors such as over-extended price and the possibility of a decision by power companies to switch back to coal. Yet for a slew of reasons, gas prices can extend this gain, perhaps to the $4 or even $5 per thousand cubic feet (MCF) mark by next spring. [Nathan Slaughter, editor of StreetAuthority's Scarcity & Real Wealth newsletter, echoed my sentiment, calling for $4 natural gas by the end of 2013 in this article.]

Here's why...

The C2G switchback?
To suggest that power producers will bail on gas and go back to coal makes little sense. Even after this run, gas is still cheaper than coal as a power source. Of course, if gas moves up toward the $6 per MCF level, then the economics switch in favor of coal. That's why we won't be seeing $7, $8 or $9 natural gas any time soon. Gas at $5 MCF, however, is still a perfectly comfortable level for power producers.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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