Matt Insley

You find me a commodity that’s heading higher and I’ll find you a way to play it.

Lately the “finding” has gotten a little harder. Price action across the board in commodities hasn’t given us many uptrending commodities – that is, except for one.

Today I want to discuss a commodity that sidestepped this week’s deluge. Instead of a 10+% haircut like we saw in gold, silver, platinum and oil, this commodity held its own. On the year, it’s up 18%.

Today, I’ll share with you my four favorite ways to play it…

In a Bad News Bears kind of turnaround, natural gas has gone from being the ugly uncoordinated kid – swatting flies in the outfield — to being the star player. Year over year it’s hands down the best performing major commodity. Depending on how you calculate it, the price of nat gas is up 29% using the July 2013 futures contract (year over year) or up over 100% from last year’s spot price low under $2.

Here’s a look at the year over year spot price:

DRH_Correction_041813

As an aside, I’ll eat some crow on the commentary we aired last year.

Around this time last year I was forecasting a “no room at the inn” scenario for the glut of natural gas. After all, there are only so many storage tanks and underground caverns to hold the stuff and when you looked at the continuing rise of production it was only natural to think we’d be filled up sooner than later.

However, that never happened.

I truly underestimated America’s ability to use cheap energy. That is, with natural gas trading around $2 all kinds of latent demand popped out of the woodwork. Power plants converted to nat gas, manufacturers quickly opened their doors and refiners started using the stuff full tilt (that’s evident I the chart above.)

Flash forward to today and we’re still producing more of the stuff in America than any other time in history. Yet even with the added supply, prices year over year have doubled.

To say there’s a market for this cheap fuel is an understatement – and frankly the scenario from here on out could see a nicely-cushioned price for natural gas. I have a feeling there are some simple math equations being done right now at power plants, refiners and manufacturers, alike. “At $4 gas, we buy and burn all we can get” the conversation may go. Maybe the new floor for nat gas prices is $4, maybe it’s $6? We’ll see as things shake out.

Something that isn’t up for question is the ample supply and need to transport this burgeoning industry. Here’s what I wrote to you about America’s shale boom just a few months ago (in December), concerning both oil and gas:

With each passing day the U.S. is producing more barrels per day. This simple up-tick in production is creating all sorts of opportunities around the country. All of a sudden there’s a glut of oil in Cushing, OK. Who profits from this glut? The guys that can move the oil.

Same goes for natural gas. With so much of the stuff flooding the pipelines there’s plenty of opportunity to process and move it. Propane, Butane, Ethane… any company, from Texas to Pennsylvania, that can process this gas stands to make a buck. And better yet, pass some of that buck a long to you!

Today the story is even better for natural gas. Now that we’ve seen a recovery in prices and a new era of natural gas demand the tide could be turning for last year’s commodity dog.

Investmentwise I’d wait for a stronger verdict to start gobbling up nat gas producers. At $4 the “dry” gas plays (the ones that don’t have any oil or “wet” by products coming up the pipe) aren’t very economic.

Not by coincidence, the move to $4+ natural gas is good for shale oil drillers. Remember, a lot of the reason we’re seeing so much natural gas hit the pipes – even in the face of a 2-year trend away from “dry” gas drilling – is that there’s LOTS of associated gas in the shale oil formations being drilled today (notably the Eagle Ford in Texas.) Simply put, in a lot of shale plays across the country when you drill for oil you get natural gas for free.

So while $4 gas may not be turning pure-play nat gas producers into winners just yet, it is adding to the bottom line for some oilier shale players.

My favorite way to play this trend remains the same. With natural gas prices firming up and oil prices expected to be above $80 for as far as the eye can see, we could be in for years of “midstream” growth opportunity.

In case you’re not familiar with the oil and gas lingo, “midstream” is the logistical stage of gathering and processing oil and gas. While the “upstream” players pull the energy from the ground, the midstream guys gather and process it. From there the “downstream” activities commence, which include selling and distribution.

Here’s a reminder of the top midstream players to look at:

Access Midstream Partners LP (ACMP) – 4.5%
DCP Midstream Partners LP (DPM) – 5.9%
Plains All American Pipeline LP (PAA) – 4.1%
Williams Partners LP (WPZ) – 6.3%

Since our December discussion these pipeline/storage/processing plays have been off to the races – up 23%, 17%, 21% and 8% respectively. Those gains aren’t including the nice dividends, either.

The choice is yours: you may want to wait for a pullback to pick up some shares or look to grab a starter position today. Either way, there could be a lot of good years ahead for these much-needed midstreamers. For now they represent a profitable way to play 2013’s best performing commodity.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

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Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

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