High fives for the bears
Today's Financial News - Posted December 3, 2009
Natural gas prices are falling again today, thanks to word of yet another surprising injection. With inventories at 99.9% capacity, what’s next?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): I am about as bearish as it gets when it comes to natural gas, but even I underestimated how bad the situation really is.
While most analysts were expecting the year’s first official drawdown in the nation’s natural gas inventories, I conceded and said they were right. I expected a drop in supplies of one, maybe two, billion cubic feet of gas.
Most analysts expected twice that figure as the nation starts to crank up its thermostat. After last week’s smaller-than-expected gas infusion, a withdraw this week looked like an easy call.
I was so certain, I recommended TFN Strategic Trader members lock in gains on a couple of our natural gas plays. We locked in gains of 56% by selling half of our position in one play and 50% gains by unloading another play in its entirety.
It looks like we jumped the gun.
According to the Energy Information Agency’s latest report, released at 10:30 this morning, the nation managed to produce more gas than it consumed once again.
This time last week, the agency showed a gain of one billion cubic feet. This week, the figure doubled to a weekly increase of two billion cubic feet.
Under normal circumstances, this would not be much of an issue. But the nation’s storage facilities are 99.9% full and pipeline pressures are rising as suppliers try to squeeze in as much of the fuel as possible.
So far, natural gas futures have not reacted too strongly to the news (which helps prove my theory about selling yesterday). December gas contracts are down by just $0.035 so far, which puts the price at $4.495.
How to play it
As the winter rolls on and investors and analysts finally realize this winter will be unlike any other for the natural gas market, that price will sink lower and lower.
At Strategic Trader, we continue to sit on several options contracts with January expectations. I expect prices to hit their lowest levels in the weeks directly following the New Year.
Right now, one of those contracts is worth gains of 357%, as its underlying asset hit yet another 52-week low following this morning’s data.
If you are a fan of the options market, you can read more of my strategy here.
If not, you have the option of shorting some of the nation’s largest gas producers, like Chesapeake Energy (NYSE:CHK) or Range Resources (NYSE:RRC).
And for those that remain weary of shorting the markets, there is no ETF trading on American exchanges that allow investors a pure short play on natural gas (they all include the oil industry), but there is the ETFS Short Natural Gas fund (LSE:SNGA), which trades on the London exchange.
It likely won’t lead you to triple-digit gains, but since the bottom remains well over a month away, there is plenty of room left for profit potential.
The natural gas industry is an interesting study these days. It is entirely disconnected from the broader commodities surge and it is creating all sorts of confusion.
Fortunately for us, that confusion is leading to strong, strong gains.
Next Article: Five Things You Need to Know About China
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December 3rd, 2009 at 9:32 pm
Hi,
With all due respect to your observation, the major addition to the inventory (8bcf) is in producing region, which is not the major gas consuming region.
West has actually added only 1bcf and East has consumed 7bcf. These are the major consuming regions.
There can be a major downside only if producers become net sellers at this point, which will be detrimental for their health and that is why it’s not happening.
The natgas price will be range bound in $4.5 – $5.5 / mmbtu during the winters.