As stated in my previous columns, more and more signs show an improving world economy. It was not only the Baltic Dry Index (freight tariffs for sea shipments) that rose in the last quarter, but commodities such as oil, copper and steel are also showing modest improvements.
Recently, (US) macro-economic figures show less weakening in the economy or maybe a recovering economy.
Of course this recovery process will not occur overnight and it will take a long time for the world economy to be on the right track again.
Current data concerning the previous months or quarters is still dramatic, but this is not that important for investors. It is more important to look at what will happen.
Commodity and stock prices are reflections of future expectations; this must not be confused with the current economic situation. For instance, the chart of the 40 largest and important companies of the BRIC-countries (Brazil, Russia, India and China) show a steady uptrend since the beginning of the year. Many Western indices, however, have been hovering in negative territory since January 2.
Due to the credit crisis, deleveraging, and the economic downturn, commodity prices dropped severely since the middle of 2008. Natural Gas Futures also faced a brutal sell-off from a peak of $13.50 (July 2008) to a six-and-a-half-year low of approximately $3.50 (April 2009).
Data published by Baker Hughes shows that the number of gas rigs operating in the United States has fallen 55% since September 2008 as prices tumbled, the lowest level since January 2003. Gas consumption decreased because many factories (in the US) were idle because of sliding demand.
The US economy shrank at an annual rate of 6.3% in the final three months of 2008 and 6.1% in the first quarter respectively.
These are 'perfect ingredients' in favour of gas prices: The market has obsessed about the whole cycle of low industrial demand and no demand. A lot of negative news has therefore been factored into the current prices. As soon as demand increases again, the decreased production capacity will not be able to meet this demand and prices are likely to increase.
Although Gas Futures rose last week by more than 20% to $4.31 there might be much more in store. A possible revival of the world economy in the second half of this year, combined with potential supply declines, may push prices even further later this year.
Of course we could expect several setbacks along the way up, however in my opinion the risk/reward-ratio is favourable to anticipate on a strong recovery of Natural Gas.
