Most of us know that the investing game has changed in the last few years. Assets that were once considered very stable are now viewed as carrying a higher level of volatility than in years past. That doesn’t mean we can’t find investments that have the right combination of growth potential and risk level, if we take the time to do some investigation. When it comes to investing in natural gas, it is important to know the past performance, how things stand in the present, and use that data to make informed projections of what will come to pass.
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Background on Investment in Natural Gas
Like most investment opportunities, natural gas has its ups and downs. In comparison to other types of assets, gas futures have a history of remaining fairly stable in most types of economic situations. For the most part, it isn’t a matter of losing money on natural gas holdings, although there have been times in the past when the returns weren’t the best. Taking some time analyze how the price of the asset has increased, hit a plateau and periodically dropped makes it easier to understand what to expect when purchasing gas futures.
What is Happening Now?
A solid understanding of natural gas prices in the past will make it easier to understand why those prices are at certain levels today. For example, most of us who follow the journey of natural gas versus oil know that for many years the two investments followed a similar pattern, with both rising and falling at the same time. Since the first couple years of the 21st century, natural gas prices have tended to remain somewhat stale while oil prices increased. It is important to note that there are no reasons to think that trend is going to change any time soon. What we are likely to see is a widening of the gap between the prices of oil and natural gas, and not any immediate upward shift in natural gas prices.
How About the Future?
While it is always important to understand what has happened with an investment in the past, it is also important to project where it is going in the future. Rising oil costs have some people thinking that now is the time to invest in natural gas. Before making that move, it is important to remember that unlike decades past, the movement of oil and natural gas prices have not dovetailed in a number of years. In fact, the cost of mining natural gas in years past was somewhat prohibitive and tended to prevent those futures from yielding much in the way of a return.
One possible strategy is to not focus directly on natural gas itself, but to turn attention to investments in companies that have developed new technology for mining the gas. Those technologies have helped to reduce the expense of mining, making the manufacturers of those technologies relatively hot properties. It is conceivable that we could buy shares in those companies and hold them for a year or two, ultimately selling them at a significant profit.
Where Does This Leave Me?
Allocating a small percentage of the portfolio to natural gas futures is not a bad idea. The key is to not overdo it. There are a number of factors that may come into play over the next several years and have some effect on natural gas prices. As other options such as solar energy and hybrid vehicles become more popular, there is also the chance that the market for natural gas will begin to increase. Since newer technology is making it more cost effective to mine natural gas, these circumstances could combine to generate a reasonable return down the road. In the interim, focus more attention on companies like Baker Hughes or Schlumberger Limited that either make the mining equipment or manage the mining process. Monitor the movement of their stocks closely. Doing so will make it easier to know how long to hold onto the shares and when to let them go and prevent incurring some type of loss.
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From The VestaTrader Blog, post On Natural Gas Investing…
