Saturday, February 20, 2010

My Thoughts on Natural Gas

To be honest, I have no clue what natural gas will do this year. It's kinda anti-climactic to be summarizing the post in the first sentence but let me tell you what leads me to my profound conclusion and what I am doing about it.

First let's look at the factors favoring an increase in the price of natural gas:
  1. It burns cleaner than coal and so is a quick replacement for dirtier fossil fuels while the renewable energy movement takes hold.
  2. Continued economic recovery will demand more energy (natural gas is used for electricity generation) and chemical feedstock.
  3. High temperatures and air conditioning use during the summer demands more electricity.
  4. Shale gas may not get environmental blessings.
  5. Analysts think the price will rise.

And now the cons:

  1. Improved technology in the collection of gas out of the shale deposits will increase supply.
  2. There is already an abundance of natural gas.
  3. Liquified natural gas from other countries is just going to add to the supply glut.
  4. A renewed contraction in the economy will suppress all energy prices.

It is easy to make a solid argument in either direction. So honestly, I have no clue. But I am still invested in natural gas through my investment in CHK (Chesapeake Energy). How am I managing this? By using protective put options. Option expiration was today (although they only trade on weekdays) and I had some expiring. I bought some new April 25 puts to cover those shares so that I am guaranteed not to get any less than $25 per share.

I actually sold some March 27 calls to help pay for the puts. Plus I have the ability to participate in any rally with the remainder of the shares. So no matter which way the price of natural gas goes, I can feel secure knowing that I am hedged both ways.

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