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Jeremy Grantham Calls for a Triple in Five Years for This Commodity

April 16, 2013 | About:
CanadianValue

Canadian Value

135 followers
I have always been a big believer in what GuruFocus.com does. I think the single best place to look for investment ideas is in the portfolios of world-class investors (gurus).

I suppose to most people that is a fairly obvious statement. Nonetheless, here is why I like looking for my investment ideas in the portfolios of the superinvestors:

1) The “gurus” are smarter than I am, much smarter.

2) The “gurus” are more experienced than I am.

3) The “gurus” have access to better sources of research than I do.

4) The “gurus” have better access to management teams than I do.

5) The “gurus” have documented, long-term proven records of performance that suggest their track records are the result of their investment process and not luck.

When one of the superinvestors on the short list of people that I pay attention to has a high level of conviction about something, I pay attention. And last week one of the greatest investors of his generation said something that kind of knocked my socks off.

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Speaking at the Richard Ivey School of Business value investing conference, Jeremy Grantham told listeners that within five years, prices of natural gas will have tripled as a short-term surplus will have turned into a long-term shortage.

Grantham didn’t just say that natural gas prices are going to go up, he said that they are going to triple.

I think Grantham is someone we should be paying close attention to. Grantham famously warned investors to avoid assets exposed to the Japanese bubbles (equity and real estate) of the late '80s, the growth stock bubble of the late '90s and the debt bubble in 2008.

Why is Grantham so incredibly bullish on natural gas?

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According to Grantham, the reason that natural gas prices will go up is because the prices in the U.S. are simply too low, at less than half the price of levels in other major economies.

That price differential is driving a huge increase in demand as plastics manufacturers, petrochemical companies, fertilizer makers and other consumers are increasing and will continue to increase demand in the U.S.

It seems that Grantham believes that the market is going to react to the difference between natural gas prices in North America and elsewhere in the world by greatly increasing demand in North America.

My only question would then be, what happens to all of that demand if natural gas prices do triple? Does all of that increase in North American demand stick around or do the higher prices kill it?

I think the supply side is also actually a reason to be somewhat bullish on natural gas prices at least in the short term.

Check out the rig count (below) and how the number of natural gas rigs has plummeted in the past 18 months:

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Now that just has to start really hitting natural gas supply doesn’t it?

From 1,600 rigs we dropped to 800, then from 800 we have dropped to 400. Given that the unconventional natural gas wells being drilled decline by 60% in the first year I can’t see how production doesn’t start sliding in 2013.

So I can see a bullish case for natural gas from both the demand and supply side. What is hard to see is the triple in natural gas prices that Grantham is suggesting. And to be honest if that wild prediction wasn’t coming from Grantham I’d just ignore it.

But the prediction was from Grantham who is extremely credible, so I think it is worth doing more work on. It is certainly going to be interesting to see how accurate this prediction is.

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

Rating: 4.2/5 (12 votes)

Comments

kennedyjoelt
Kennedyjoelt premium member - 1 year ago
I don't believe the full cost of fracking over the life of wells is settled. I.e. the fast drawdown subsequent to fracking creates a running to stand still situation requiring more capex to produce. What exactly is the marginal cost of an Mcf? I bet it is higher than what we have had over the last year. Triple? I doubt it but definitely upward over the medium term.

Max7777
Max7777 premium member - 1 year ago
Thank you for a great article and interesting points both on why we should pay attention to top gurus, i also agree that and one of the best; but you left out the main issue: what is the best way to take advantage of

Did he say that or do you have any ideas?

What are some possible low risk, high reward vehicles to take advantage of this idea?
BEL-AIR
BEL-AIR - 1 year ago
Goldman Sachs also says the place to be is natural gas going forward....

http://blogs.marketwatch.com/thetell/2013/04/16/forget-gold-natural-gas-is-the-new-safe-haven-goldman/

I for one are now buying the beaten down natural gas equities....

Lots of good ones if you know accounting like anything else.

sapporosteve
Sapporosteve premium member - 1 year ago
I think Grantham also stated that lumber would perform well in 2009. And I recall that it has outperformed.

I like to look at the amount of the portfolio which any Guru has in a stock. Lots of them have small amounts in a wide number of stocks, but if you look at where their big money is (like Berkowitz in AIG) then I think you can believe that the Guru is very confident of their position.

CHK - Pabrai holds a lot as does Icahn. As do I............
Carol Nadon
Carol Nadon premium member - 1 year ago
So wath about Carl Ichan and T. Boone Pickens ?
kfh227
Kfh227 premium member - 1 year ago
Is that rig count for wells producing natural gas or is it for all rigs, including those doing exploration?

What does the world rig count show? If looking at supply/demand, that is important.

FWIW: I am long SD.
kfh227
Kfh227 premium member - 1 year ago
Also, how have companies that rely on natural gas hedged natural gas? Once hte hedging ends, prices can go up. But if companies today are buying out to 2016, the notion that prices could go up is not so cut and dried.

Please leave your comment:


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