Cold Weather Means Higher Natural Gas Prices

Timing is everything for investors looking to add natural gas stocks to their portfolios.

With wintry weather settling over most of North America, analysts are cautiously optimistic that increased demand for the home-heating fuel will make it an attractive investment once again.

But prospective investors should hold off on making a move for now.

"It's going to take at least another heat-winter cycle to get things soaked up," said Bryan Gormley, the Canadian Gas Institute's director for policy and economics.

One nasty snowstorm isn't going to do it. The natural gas industry needs months of consistent chilly temperatures for there to be a price impact.

Since 2006, natural gas prices in North America have been dragged down by a surplus overhang resulting from two balmy winters and one tepid summer. Drilling activity plummeted in 2007 and is expected to continue dropping next year.

"The Canadian natural gas industry has been operating under very challenging economic conditions over the past couple of years," said Barry Munro of Ernst & Young's Global Oil and Gas Center.

But taking a longer-term view, though, Munro said he is "very bullish about the prospects for natural gas."

"If it stays cold throughout the rest of the winter and we get to a better level of balance around natural gas supplies, I think that you'll see a much more bullish outlook heading into the fall/winter of '08-'09."

While weather is the key factor affecting natural gas prices, it certainly isn't the only one.

One major "wild card" is the increasing use of liquefied natural gas, or LNG, Munro said. The gas is condensed into a liquid in ultra-cold temperatures, making it easier to store and transport.

Currently most LNG ends up in the already saturated North American marketplace. But in the future it will be easier to transport it to places where it can be sold for a much better price, Munro said.

Today natural gas can be sold for about $3 more per thousand cubic feet in Europe than in North America.

Investors should also look at developments south of the border before buying natural-gas related stocks. Ramped up drilling activity in the United States could offset the effects of Canadian production cuts.