Top Commodities of 2008

IT SEEMS THAT THE COMMODITIES COULD BARELY WAIT for the clock to strike midnight on New Year’s Eve before they were off to the races. Both gold and oil have hit record highs, and stocks in those sectors are going parabolic as I write. Agriculture is on fire, as well. Corn is at an 11-year high, soybeans are trading just short of a 34-year high, and wheat surpassed $10 for the first time.

With prices at these levels and markets as volatile as ever, you have to proceed with caution in these markets. They are very susceptible to a strong pullback at current prices. Me personally, I’m not looking to try to set up new positions and nickel and dime the rest of this short leg up. I have put tight stop losses on my current positions, and I will wait for the next serious pullback to set up new positions.

In the meantime, there is a big story brewing. In my opinion, this could be the biggest story for commodities markets in 2008.

Dear reader, I am talking about natural gas. I believe that natural gas will have a huge year in 2008, and there’s good reason to believe so.

I would like to start by noting that natural gas exploration was down in 2007, and is also expected to be down again in 2008. This seems logical for the non-forward-looking energy-producing and exploring companies. I mean, why would someone explore for natural gas with oil trading at $100 per barrel and looking to go higher?

The answer is just that reason. With oil trading at $100, people will begin to look for feasible alternatives. Over the next few years, natural gas seems to be one of the most plausible solutions.

You have to look at the alternatives. I love nuclear energy, and we could sure use a whole lot more nuclear power plants, especially in the U.S. The problem there is that the nuclear industry is still trying to overcome political obstacles, as ridiculous as that sounds.

What about renewable energy? Well, simply put, for renewable energy to be a reasonable near-term solution, we would have had to start seriously implementing all forms of renewable energy about 10 years ago, and we can’t change the past.

So it seems that even if natural gas were a poor substitute, we would be forced to continue to develop it. The beautiful thing is that natural gas is a good alternative.

At current prices, it costs twice as much to produce a British thermal unit (BTU) from crude as it does from natural gas. In today’s world, we can’t help but notice the political attitude toward energy production from a carbon-emitting standpoint. The U.S. sits on more coal than any other nation in the world, but because coal doesn’t burn clean, we won’t see coal power plants popping up on every corner. You might be curious to know that natural gas is the cleanest burning of all the carbon-based fuels.

Also, say what you will about liquefied natural gas, but it is an ever growing market. At that point, it becomes even cleaner to burn, but it is also less economical. As well, not only can natural gas be used in power plants, it can also be used to produce diesel fuel.

Since natural gas seems to be one of the only feasible alternatives, is clean burning and has experienced declining exploration due to crude prices, I believe that natural gas will be the best performing commodity in 2008. I believe it is trailing slightly behind most other commodities in the commodity super-cycle, but believe me when I say that natural gas will be a crucial aspect of supplying power to the millions of people in the emerging markets that will be coming onto the power grids in 2008.

A company worth looking into in this sector is Delta Petroleum Corp. (DPTR: NASDAQ). Delta is located in Denver and is involved with the exploration and production of natural gas, as well as crude oil. It is also very actively involved in M&A. It has operations in both the Rocky Mountain and Gulf regions. It is already producing, which is very important to me when looking at juniors and intermediates in the commodities sector.

One thing that really jumped out at me about DPTR is that Kirk Kerkorian’s Tracinda recently purchased a 35% stake in Delta at a 23% premium to market value. It seems that I’m not the only one who likes the potential of DPTR going forward as it continues to expand production and exploration in order to build revenues, as well as its proven and probable reserves.

Nick Jones
February 7, 2008