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A coming surge in crude oil production suggests that investors should move money from petroleum firms to natural gas producers during the fourth quarter of 2012.

In a recent report on the long-term outlook for the global energy sector, Goldman Sachs analyst Michele della Vigna notes that while crude supply will be tight in the short term, oil produced from shale deposits will produce a glut over the next two years. "Non-OPEC supply growth is likely to pick up in 2013-2014 to over one million barrels a day (mostly from the U.S.) … for only the second time this decade. This should lead to a softening in the oil market," Mr. della Vigna writes.

The increase in supply will occur at a time when global integrated oil companies are struggling to maintain profitability as oil fields become increasingly expensive to operate and production declines in conventional oil fields. The Goldman report estimates that the return on investment for the industry as a whole has declined by 28 per cent since 2005 despite a doubling of crude prices.

While the future profitability of oil producers may be under pressure, the recent attempt by Malaysia's Petronas to take over gas producer Progress Energy Resources Corp. at a 90-per-cent premium to its stock price before the offer suggests that patient investors still see a bright outlook for natural gas demand.

To be sure, overcapacity is also an issue for natural gas, but much of this is already reflected in current commodity prices and share prices. And consumption of natural gas is on the rise, particularly in the United States. Asian nations, notably Japan, have already completed major infrastructure development in preparation for a broad shift to liquified natural gas (LNG), a trend that will further support demand for the commodity.

Natural gas producers may be undervalued while risks for crude producers may not yet be reflected in stock prices. Investors should consider shifting a portion of their assets from oil-producing investments toward natural gas producers.

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