The past 18 months have taken a serious toll on normal supply and demand in many industries. But no industry was impacted more than energy…

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

September 23, 2009

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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