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The Death of Natural Gas

by: Trader Mark July 17, 2008 | about stocks: UNG    
Trader Mark

Trader Mark

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Yes the story is over!

Or at least until the United States Natural Gas Fund (UNG) hits $47 (200 day moving average)

p.s. the Haynesville 4 are finally breaking down to more attractive prices. But still too early to get in there wholesale because hedge funds have decided the story is over. So it is. Until they change their mind. (I wonder what Benjamin Graham would think of this newfangled "investing" that dominates the markets nowadays)

Of course this has nothing to do with huge pools of capital whose computers move from 1 theme to another like a butterfly resting on top of one flower and then the next (this week's sexy flower? healthcare!).

Nope, it's all FUNDAMENTALS that create these massive 180 degree turns ;) yep.

Remember "the playbook" we've long talked about. It's simply the pattern that has marked itself consistently in these past 4 corrections of 2007 - 2008. At the end of the correction hedgies move from their hideout places to the beaten "worst of breed" down sectors (rotation station) and then will (as a bonus) find a new 'safe' place and create a thesis that they can use as justification. In the past they were using consumer non discretionary (before input costs ramped and that thesis below up), and then technology (before they were not so "immune to slowdown" after all, and that blew up in their face) - now they will create an investing case for healthcare. Because a Democratic Congress and President [2009] is always to the benefit of healthcare companies (cough). But nevertheless, perception is reality. And the healthcare stocks as a group have been beaten to an absolute pulp. As long as enough dollars are chasing a theme, the stocks can react to said flood of dollars.

So if the past is replayed right about the end of July/early August - they'll abandon all these newfound themes [hey financials are not as bad as we thought! or ... why was I not in JCPenney (JCP) all along?] and be right back into the same global growth plays. Just about time Iran saber-rattles or a hurricane forms somewhere far out off the western coast of Africa.

Yep, global growth - it's dead. China "collapsed" (using CNBC parlance) to 10% GDP growth - hide the women and children. So we're supposed to invest in the countries with 0 to -2% GDP (parts of W Europe, Japan, and US) and run away from the 10% growth or 5% (Brazil). Got it. Buy worst of breed or the "new safety valve". ;) (for a week at least)

We'll wait it out. (Have I mentioned this is not a buy and hold market? Every single stock is taken out and shot sooner or later. Bear markets. Fun.)

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This article has 16 comments:

  •  
    Jul 17 02:33 PM
    As natural gas and crude begin to get slaugtered for longs, maybe we should use this guys strategy to protect ourselves. www.greenfaucet.com/fa...
    Reply
  •  
    Jul 17 02:51 PM
    there will always be greater value in coal and NG vs. oil simply because they are more plentiful and available in the good old USA !
    Reply
  •  
    Jul 17 02:58 PM
    Seems there's a correlation between financials & oil/gas. The manipulation/bailout of Fannie & Freddy being the tripwire that sent every hedge fund out of NG and into financials.

    Frankly I'm annoyed by any gov't bailout with the notion that our economy is based on free market & should NOT have a fat mother ready to come and get her kid safely off the playground where the bully reigns.

    This only prolongs this present disaster, making things worse.
    Reply
  •  
    Jul 17 05:02 PM
    You did not mention that Ngas is in the hands of god almighty who controls the storms (hurricanes). He is even more quixotic than the hedges who are really just pikers that will in the end follow the weather like so many druids. Hold on to your Ngas for the day the Gulf is wiped out. We who are religious know its coming. Besides, I am long.
    Reply
  •  
    Jul 17 05:21 PM
    Back in March when the Financials rallied, it was Gold that collapsed, as CNBC declared the Commodities Bull Market "over".

    This time it is Oil + Gas falling, while Gold actually is holding up ok.
    Reply
  •  
    Jul 17 05:54 PM
    If nat gas gets back to the historic ratio with oil (nothing says it must) which is 6/1, and if oil gets back to $120, that still makes nat gas $20, if oil went to $100 nat gas would be $16+, I gotta think nat gas is still cheap going forward, and yes, that's longer than this qtr.
    Reply
  •  
    Jul 17 08:03 PM
    NG is the must have commodity. It will stay strong on demand and strong on clean energy initiatives. All commodities take wild swings. NG has almost completed a 50% retracement of its massive run -- which it did with almost no pullback. Thus -- when a 100% ends -- the pullback is usually massive. (SKF holders nod their heads.)

    I agree UNG will probably flatten out --around the 200 day MA is about right. Far too demand over the next 30 years for UNG to ever 'die'. Rest for a quarter no doubt. NG will be back. As for the 'oil is bubble' crowd. About the time they start slapping high fives and saying "I told you so" on CNBC -- buy it all.
    Reply
  •  
    Jul 17 09:37 PM
    Two comments:
    1) You are right about health care. This is now the place to be.
    2) Gold, not oil/coal/gas is the commodity to be in.
    Reply
  •  
    Jul 17 10:01 PM
    Since Russia and Iran control 50% of world gas reserves, there is no way US Treasure and Feds can manipulate gas prices for long.

    Remember that the Fed and ECB are still printing US$ and euro to save their economies.

    The world energy game is just started.
    Reply
  •  
    Jul 17 11:46 PM
    Natural gas prices might also equate to become ultra efficiency when the utility of its hydrogen counter part is factored. The cleaner fuel is the rule of the day. Co-generation natural gas to hydrogen systems that are used to produce a distributed means of power supply to produce transportation, heat, or electricity at the consumer level is a new age that could best raise the standard in which we now use fossil fuel to become a greener more sustainable environment. Or that, if the economy of fuel consumed is doubled, then it isn’t so much a question of who has the most resources but who can manage the resource in the most effective way. In a geo-political sense the more control an individual has over the fuel they need then the less control and obstruction others will have on that person’s ability to live freely and happily. It is the system and standard of values that will ultimately command the market place because of ones own desire to live freely than to war with others over such task as liquid or gas buried in the ground.
    Reply
  •  
    Jul 18 08:33 AM
    for many applications (typically industrial) NG can be replaced by medium-BTU (300 Btu/SCF) fuel gas from coal, using steam/oxygen-blown gasifiers & gas purification systems. there was an artificial shortage of NG in the market during 1973-74 caused by producers keeping newly discovered resources off the market to drive the price up. the response was a DOE demonstration project in memphis using IGT's U-gas process. this project was killed in 1981 by the r.reagan administration. remember that the temporary shortage caused a lot of irrational behavior with deep gas & tight formations called take-or-pay contracting. this meant that only the 8.00/million gas was produced and the 1.50/million gas was left in the ground, a mechanism guaranteed to screw consumers. the result was the bankruptcy of the columbia gas system. hope we don't have a repeat of that episode, take or pay was contrary to rational public policy.
    > jack
    Reply
  •  
    Jul 18 09:47 AM
    The historical price relationship between oil and nat gas has always been in the 10:1 range despite the 6:1 btu value. There are a myriad of reasons for this disconnect which would take many pages to discuss.
    Nat gas has been struggling to make the 10:1 ratio and I do believe it is because of the geopolitical premium in oil at this time. Accordingly I do believe the fair market price of oil should be $100-110 putting it right where it should be according to the 1967 CPI index.
    Hedge fund activities and speculators have a short term,and as we see currently, an extreme effect on price volatility but over time they have no effect in the market because they never take delivery.
    Reply
  •  
    Jul 18 09:55 AM
    cmon folks-this whole thing has just become a computer style vegas gambling operation.just slower.its not illegal & ok as long as the average joe on the outside is going to realize this.add to it conservative socialism(to save the big players)& the investor does not stand much of a chance.
    Reply
  •  
    Jul 18 10:23 AM
    Nat gas has dropped due to two things: first, oil prices are falling and the herd naturally thinks we should bring nat gas too. They aren't that related/coupled, but the herd thinks so. I hear many well-respected financial analysts say "CHK has to come down because oil is way down". Well, CHK produces 90%+ nat gas and is hedged 80% in 2008 and 70% in 2009. What does oil price have to do with CHK??

    Second, supply in the US is growing rapidly. Rigs are churning, Billions are being invested on nat gas drilling. Way more than oil drilling. As the economy slows, nat gas demand will slow a bit. But nat gas usage in A/C and heating won't go down. Plus our greenie weenie friends will start to push nat gas over some of the other sources.

    LNG imports are way down this year as the price of nat gas in Europe and the Far East are well over $15 and so LNG is being diverted to these markets and away from the US. Last year LNG imports were around 3 BCF/day and now they are down to 1 BCF/day. This will continue as prices in the Far East and Europe don't look to come down anytime soon.

    Start nibbling in nat gas stocks and the commodity. We may not be at a bottom but we are getting close. And then there's the probabliilty at some point this summer/fall we will get a Gulf of Mexico hurricane. We are lucky to have missed many of these last year and year before but odds are against us missing again this year. It doesn't take a Katrina to disrupt things.
    Reply
  •  
    Jul 18 12:07 PM
    ng can power cars,etc and is friendly to the environment. palm springs public transport buses have been running on it for many years. so what's the big deal? are the oil companies behind keeping ng out?
    Reply
  •  
    Jul 18 12:54 PM
    "Pain at the Pipe Line
    PNM tells customers to prepare for higher winter heating bills

    By Winthrop Quigley
    Journal Staff Writer

    SANTA FE - The state's largest natural gas utility on Tuesday warned customers to prepare for significantly steeper heating bills this winter.

    In a briefing for the Public Regulation Commission, PNM gas supply and transmission operations director Tommy Sanders said that natural gas that cost 78 cents a therm a year ago is selling for about $1.30 a therm today. The average residential customer uses about 59 therms a month year-round.

    PNM won't be ready to project what this winter's bills will be until August, but they will be "significantly higher," said spokeswoman Susan Sponar.

    ..."

    www.prosefights.org/pn...
    Reply
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