Now that the stock market has soared 40% from its March lows, almost no one can seem to remember what they were so worried about. By contrast, now that the price of natural has collapsed 40% in the last seven months, almost no one can remember why they ever worried about an energy shortage.

Mr. Market is about to heal America’s collective amnesia.

Investors will once again remember why they were selling stocks last March, and they will also remember why they used to invest in natural gas.

Share prices have gained a lot of ground during the last few months, even though the economy has not. The major averages have rallied about 40%, but many stocks are up a whole lot more than that. Seventeen of the thirty-three stocks I have recommended to the subscribers have gained more than 50% since those March lows. Eight are up more than 100% and one is up more than 200%.

Robust rallies like these are not uncommon, even in the worst of markets. By now, you’ve probably read about how the stock market rallied 41% in early 1930 after the crash of 1929. Yet that rally fizzled and the stock market tumbled to even lower lows, and had years of hard slogging ahead of it.

I’m not saying this is 1930, but I would caution against overconfidence. Investors should be looking to hedge their bets after this recent rally… and should be looking for a margin of safety. I believe natural gas might be a great place to hide.

Natural gas is, simply put, super cheap. As most other commodities – including oil – have rallied, natural gas has remained stuck in the mud. In fact, the ratio of the price of crude oil to the price of natural gas topped 18-to-1 recently, which is a ratio we have not seen since 1990.

The spike in this ratio is due to two very simple facts: oil prices are rising, gas prices are not. The prices of these two energy sources tend to loosely track one another. But as the chart below illustrates, the prices of oil and natural gas have diverged dramatically during the last six months.

This trend has not been pleasant for natural gas producers, nor for the folks who have been investing in natural gas stocks. In this market, where nearly everything is rallying, the shares of most natural gas companies have been conspicuously sluggish. But the past is not necessarily prologue. I have not seen a better opportunity in many years to buy natural gas stocks.

Let me lay it all out for you before you click “delete” on this e-mail.

There are two reasons why natural gas prices are likely to rise from their current depressed level:

1. Natural gas exploration efforts are dropping rapidly, which will lead to a drop in supply.
2. Government initiatives will create significant new demand for natural gas.

Let’s begin by acknowledging that the price of natural gas fell because there was too much of it. We are in a recession, after all. Industrial demand for natural gas has fallen through the floor and into the basement. But the best cure for low prices is low prices.

Producers are cutting back, thereby reducing supplies. The rig count has collapsed. It has fallen much faster than in the 1981/82 collapse, the worst drop since the Great Depression, and one that still makes old-time natural gas men cringe to this day. Meanwhile, the decline rates on shale gas plays (which helped contribute so much gas to supply during the last few years) are 60-75% – meaning that the flow of gas from these wells will drop by this percentage in the first year.

Another point: The marginal cost to produce natural gas for the vast majority of natural gas companies is somewhere around $6-8 per thousand cubic feet (mcf).

Production costs are an important guide to natural gas prices, as the nearby chart illustrates. The natural gas price usually bounces off the “cash cost” of production. No producer makes money below cash costs. So supply drops. Conversely, when gas prices gravitate toward the marginal cost of production, supplies increase, thereby putting pressure on prices.

Right now, the spot price of natural gas is under $4 – sitting right on the industry’s cash costs, but well below marginal costs. In short, natural gas supply is going to start to dry up here really soon.

Meanwhile, the war on so-called greenhouse gases is officially under way. As this war progresses, clean fuels like natural gas will attract growing demand. Each passing month brings us closer to capping, taxing or cutting the gases thought to cause global warming.

I don’t think investors appreciate how far-reaching such efforts could be. And there will be definite winners and losers as a result. Some of these are far from obvious and some are in plain sight.

The first obvious big loser is American coal, from which we get half about of our electricity needs. Already, you see companies reacting to this news. Consol Energy, a big coal company, said it halted two big mines in Appalachia because of uncertainty over the costs of pending new regulations. If you own a U.S. coal miner, I’d fold the hand, so to speak.

Coal-fired power plants look like big losers, too. And the utility AEP, the biggest user of coal in North America, is looking to shutter some of its coal plants. It is also looking at how high rates would have to go to comply with possible rule changes. In some places, rates could rise as high as 50%. It is no sure thing that AEP could get such rate increases. Natural gas-fired plants, by contrast, may be one winner relative to coal. Natural gas, in general, looks to be a winner.

Beat the rush; buy your natural gas stocks now.

Source: To Do: Buy Natural Gas