We have all witnessed (and perhaps lost money in) the recent and enormous crash and burn in natural gas prices, with the largest natural gas ETF, United States Natural Gas Fund (NYSE:UNG), down some 45% since last September. The recent bounce in natural gas prices , thanks to Chesapeake Energy‘s (NYSE:CHK) production cut announcement, might indicate that the fuel has hit rock bottom. But it has a long way to go before ever hitting its old highs again.
The bear market in natural gas is rooted in several causes, including a warm winter so far combined with new exploration and drilling techniques such as fracking, which has led to more supply than demand. Oil, however, could save natural gas in the near future, especially if supplies are limited by political action in the Middle East.
This week the European Union announced that it will ban imports of Iranian oil in response to the country’s continued development of its nuclear weapons program. Iran responded by repeating its threat to block the Strait of Hormuz. That news supported oil prices around the world and further cast a shadow on Europe since so many of its countries, including Italy and Greece, heavily depend on Iranian oil.
Crude oil spiked to $99 per barrel on news of the sanctions, and U.S., French and British Navy vessels are currently prowling the Persian Gulf to keep the Strait of Hormuz open and so ensure the uninterrupted flow of oil to hungry world markets. Any action by Iran to close the Strait would throw energy markets into chaos because 30% of the world’s oil tankers travel through the Strait.
Any such closure would certainly spark armed conflict, even if it is likely to be short-lived because the Iranian navy would be no match for the power of the U.S. Navy’s 5th Fleet. President Obama and the U.S. Navy have already stated their intentions to keep the Strait open. However, intense volatility in energy prices could be expected if tensions mount and Iran actually stands by its threat.
Herein could be a possible savior for natural gas prices and a trigger for a new bull market in this “alternative” energy source. Over the past several months, we have seen that oil prices are directly correlated with rising tensions between Iran and the West. Simply by looking at the chart below of the United States Oil Fund ETF (NYSE:USO), one can see oil prices rising since the U.S.-Iran friction began rising again in November.
Chart courtesy of www.stockcharts.com
If Iran continues its quest for nuclear weapons and in turn closes the Strait of Hormuz in response to an oil embargo, market forces will put a premium on oil, in particular, and on the entire energy complex — including beaten down natural gas. A sanction on Iran’s oil supply directly affects energy prices in Europe, Russia and China, all of which would greatly benefit from cheap natural gas if U.S. versus Iran becomes a reality and oil prices spike.
Although sustained conflict and severe, permanently high oil prices aren’t a likely outcome to conflict in the Strait, a short spike, followed by higher prices would add allure to the cheap energy potential of the “blue flame.”
Looking past potential short-term disruptions in global oil supplies, natural gas offers a readily available supply of energy that happens to be abundant in the U.S. and Canada. If exploited on a large scale, natural gas could solve many of North America’s energy problems.
While it could take decades to make a significant transition from oil to natural gas, the benefits would be significant because oil prices depend upon security and political considerations in the Middle East. Any supply disruptions will cause oil prices to spike, add to the already pervasive sense of global insecurity and so automatically drive markets to a cheaper, easier fuel source that doesn’t come from such a volatile region.
Natural gas fits the bill, supplies are ample and secure, and so the economics and politics of oil could very likely save and support natural gas prices one day in the very near future — and for many, many days to come.
