Natural Gas Opportunity Building

Call me crazy, but I am interested in what is happening with natural gas (UNG) first as a commodity and second with the stocks that are the major players within the energy sector. The chart below is UNG, United States Natural Gas ETF and as you can see the last five weeks have been very interesting relative to the price volatility. After hitting a low of $19 on October 27th the price ran to $23.16 on November 6th or a jump of 21.8% in eight trading days. Now that is impressive to say the least. However, since then we can see the price has manage to hit a low on December 4th of $18.56 and that is equally impressive on the downside. The bounce on Friday off the lows put it back above $19 and in a position to bounce.

Chart

Fundamentally the challenge is based on supply and demand. The supply for natural gas has grown significantly in the US, but demand has not risen enough to maintain consistent pricing pressure on the commodity. The cold start to winter is the speculative reason for the twenty plus percent jump in the price last month. As you can see equally when the warmer weather returned so did the price. Speculation in commodities is volatility game and you can lose as quickly as you can make. The weekly inventory data on Thursday showed inventory numbers were lower than expected and that should have been a positive for the commodity, but as you can see it actually fell 4%? Of course, the speculation of weather overrides the fact of lower supply. The assumption being that supply will rise again due to the projected warmer weather and thus, discount the news and focus on the speculation. That said, it has bounced 4% off the low on Friday and maybe, just maybe, some sanity has returned for the day.  

The stocks have suffered more than the commodity as they have the added pressure of crude oil prices on the energy sector stocks overall. Throw in the utility and MLP stocks and you find a tremendous amount of price destruction during this period across the board. Thus, it begs the question, is there opportunity in this destruction or is there more downside risk unaccounted for? You know the answer… it depends on what happens to the price of the underlying commodities and profitability of the companies involved. Investing is a science of gathering all the facts and then putting forward your best efforts to be right at the right time. For me it is more important to be right than for the timing to be right, although the timing is what makes you look extremely smart in the eyes of others. I will still go with being right as the key. If you are early by several months of time you can manage and hedge the risk of the trade until the market/other investors see the same rationale that you see. When the great minds align the stocks will rise and more buyers will push the prices to previous highs and beyond based on the data presented going forward.

The first step towards this scenario is to follow through on the bounce. On Monday we need to confirm the bounce and we do want volume to rise showing momentum and or interest in the sector. This opportunity will unfold, we just have to be diligent enough to let it happen in the time frame of investors and not the one we want. I will post more on Sunday relative to our approach and strategy with this sector heading into next week.