With prices at these levels and markets as volatile as ever, you would have to proceed with caution to invest in these markets. They are very susceptible to a strong pullback at current prices. If it were me, I would not look to try and set up new positions and nickel and dime the rest of this short up leg. I would put tight stop-losses on any current positions, and I would wait for the next serious pullback to set up new positions. In the mean time, 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 (NG). I believe that natural gas will have a huge year in 2008, and there’s good reason to believe so.

Natural gas exploration was down in 2007 and is 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 NG with oil trading at $100/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. In the following couple of 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 natural gas-based power. The beautiful thing is that natural gas IS a good alternative.

At current prices, it costs twice as much to produce a BTU from crude as it does from natural gas. In today’s world, we can’t help but notice the political attitude towards energy production from a carbon-emitting standpoint. I mean, 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 NG 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 is becomes even cleaner to burn, but is also less economical. Also, both power plants and diesel fuel can use natural gas.

Being that NG seems to be one of the only feasible alternatives, is clean burning and is experiencing 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, Colorado and is involved with the exploration and production of natural gas as well as crude oil. The company is also very actively involved in M&A. It has operations in both the Rocky Mountains and Gulf region. Delta 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 to me about Delta is that Kirk Kerkorian’s Tracinda has recently purchased a 35% stake in the company at a 23% premium to market value. It seems that I’m not the only one who likes the potential of Delta going forward as it continues to expand production and exploration in order to build revenues as well as its proven and probable reserves.

Regards,

Nick Jones
January 8, 2008

P.S.: Speaking of alternative energy, fellow commodities expert Byron King has five amazing picks in a unique type of alternative energy called, “Slow Volcano.” A California energy bill will legally force the state to produce 20% of its electricity from sources like Slow Volcano power by December 31, 2010.

Invest in the Best Commodity of 2008 was originally featured in the Penny Sleuth.