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Natural Gas Is Oversold, and We Are Buying

by: Andrew Horowitz August 29, 2008 | about stocks: UNG    

Andrew Horowitz

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Recently, we bought U.S. Natural Gas Fund (UNG) for The Disciplined Investor Managed Growth Strategy portfolios…

Below is an interesting graphic that shows the effect on energy commodities by the legislation that closed the Enron Loophole. Even though there has been a great deal of discussion concerning the supply and demand factor, specifically related to China, it is clear that since July, the precipitous fall of energy commodities is not due to a reduction in demand. Supply/Demand had little to do with what occurred. It was rampant manipulation and speculation, and this graphic provides more proof.

The chart shows the percentage change of the three energy related ETFs (funds) that track natural gas, crude oil and heating oil. Of those, natural gas has fallen the greatest amount (37% down) as is appears that it is not the main target of speculators any longer.

Basically, even as there are arguments showing that there is plenty of supply of natural gas, the demand for cleaner burning fuels should continue to grow. Demand should continue into the future. Although now it may be at a more normalized pace. So, the timing looks right to begin to enter a position of UNG at these levels.

From my recent MSN Strategy Lab commentary:

All that aside, it still seems likely that clean-burning fuels will be much sought after and natural gas is going to see increased demand. After climbing more than 50% from January into July, United States Natural Gas Fund has dropped just as fast. Now resting just off its consolidation levels, natural gas prices have fallen 30% since the so-called “Enron loophole” was closed for natural gas and heating oil. This is now a demand play, and I’m adding it to provide diversification to my Strategy Lab portfolio and hedge the potential for runaway energy prices.

(Click chart to enlarge)

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This article has 15 comments:

  •  
    Aug 29 04:56 AM
    "there are arguments showing that there is plenty of supply of natural gas"
    and are very convincent, so it looks like a fundamental move...
    Reply
  •  
    Aug 29 08:02 AM
    could the drop in nat gas pricing be due to the recent "discoveries"... or rather publicity around large new deposits?
    Reply
  •  
    Aug 29 08:39 AM
    You're timing is all wrong, the latest inventory build shows that there's way too much supply coming on. Wait till the winter to buy NG at the earliest.
    Reply
  •  
    Aug 29 08:52 AM
    It's all about supply and demand...demand has been dropping over the last few months and supply appears to be increasing due to the high level of drilling brought on by the shale gas plays. However, both of these factors can whipsaw in a hurry.

    Demand is dropping due to weather (cooler than normal summer) and overall economic slowdown. But it takes but one or two heat waves, throw in a hurricane (or 3 as it looks like we might have over the next few weeks) to make that consumption spike. And we are still seeing sustained high oil prices which creates a good window for fuel switching to cheaper natural gas. And the drive for cleaner burning fuels, which is natural gas for the immediate future. All of these can drive demand back up in a hurry. And if/when we get out of our recession toward the end of 2009, consumption will also increase.

    As prices start to fall, you will see some of this new drilling slow down. At $6/mmBTU, several of these plays are not economic and the companies will stop drilling wells or shut wells in. The nature of the new shale plays is high initial rates and rapid decline in the first 6-9 months. So when the drilling slows down and new wells aren't put online as fast as they were when prices were higher, then overall supply will quickly fall.

    This pricing impact is a form of reversion to the mean. As prices go up, drilling increases, marginal plays become economic and supply increases. As supply increases, prices go down, some plays become uneconomic, drilling slows down and supply decreases. Then the cycle starts all over again. Play this cycle and you will be well paid!
    Reply
  •  
    Aug 29 09:19 AM
    The role that nonconventional natural gas will play in replacing falling [since 2001 according to EIA] conventional natural gas is interesting to follow.

    We were approached by Quaneco to invest in a Wyoming natural gas project in 2006.

    Can't find much about Quaneco these days.

    There may be lots of money to be made ... or lost ... in nonconventional natural gas projects.

    www.prosefights.org/pn...
    Reply
  •  
    Aug 29 10:29 AM
    Dont buy it yet.
    Heat season starts in NOV.
    Draw downs will be big in Jan and Feb.
    Reply
  •  
    Aug 29 10:58 AM
    I own natural gas royalties, so I have a vested interest in price stability.

    The future of natural gas les in the distinct possibility and probability that sooner than later, the national vehicle fuel not only of choice, but of necessity, will be compressed natural gas CNG.

    That conversion to CNG will rapidly render crude oil based gasoline (iso-pentane) a dirty past memory. To enable this massive conversion we must have a massive reserve base. That is what is going on now--establishing the proven gas reserves that will guarantee that there will be sufficient supplies that will support the enormous demand motorists will make. Once the reserves are there, the infrastructural changes will quickly follow suit. You can bet that the "Little or Dissappearing" Big 3 Auto Makers will get their act in gear.

    Owning any piece of this picture would seem to be a very profitable venture.
    Reply
  •  
    Aug 29 12:28 PM
    Buy UNG. Sell covered calls.
    Reply
  •  
    Aug 29 12:52 PM
    you don't say whether methane futures are in contango or backwarddation.

    THIS IS CRITICAL INFORMATION.

    do some homework, this blog is unsupported opinion.
    Reply
  •  
    Aug 29 03:14 PM
    Europe seems to be moving to CNG [Compact Natural Gas] for vehicles. China=SNEN Designs,Implements,Man... Gas Bottles,systems for Vehicle [think local delivery trucks,autos] Building Stand-alone CNG Stations in 2 large cities...and...bought 80% each of 2 wholesalers odf CNG to guarantee supply...

    When I see a US or Canadian company doing the same..I will buy the future...In the Meantime CanRoy Gas Trusts...in CAD$ portfolios..dividends OK for a few years..good Luck yáll
    Reply
  •  
    Aug 29 05:29 PM
    Don't buy now, wait for a strong test of support. It's likely UNG will continue to the downside.
    Reply
  •  
    Aug 29 09:39 PM
    The idea in investing is to buy low (when evryone else is selling ) and sell high ( when everyone else is buying ).Smart strategy .
    Reply
  •  
    Aug 30 08:53 AM
    This guy is going to lose money,but don't worry,it is not his money are at stake but stupid investors',his he keeps in CD's,mortgage,underwea...

    I have read 30-40 words of it,maybe you are right but I am sure you never traded a single NatGas futures contract as otherwise you would not have time researching it,you would be broke as even at 10-13.50$ NG looked cheap compared to Oil.
    The real trade have nothing to do with any kind of spread/discount just ask Amaranth Advisors how they lost 13$ billion trading NG with most complicated algorythmic software,ask T Boone Pickens if he is bullish on NG now,he will punch you i the face and send you one way to hell,ask Sem Group LP that lost more than 10$ billion on Oil/NatGas futures and options plus OTC (I hate otc) if they are bullish on CL/NG they will through you out of the window of their skyscraper office.
    Bottom line reality check:
    NG is really cheap if one believes Oil at 115$ is cheap,NG is expensive if one believes Oil is heading for 100,90,85,70,65,55? next year.
    You decide what is cheap what is expensive,I sold NG October at 8.10$ and sold put 8.00$ October against it for total profit I can make in 30 days 7600$.I did it on the news Gustav is going to crash all the platforms in the Gulf of Mexico and beyond it.
    Maybe I am crazy,maybe not,time will show.
    Reply
  •  
    Aug 30 09:09 PM
    buy low, sell high, yea yea. Except when you buy on a downtrend, that's called a falling knife. That's why the low-risk/high reward and reliability is buying at the first pullback of a breakaway from the downtrend. That's a smart strategy.
    Reply
  •  
    Sep 01 11:35 AM
    This is a relatively old article but gives pros and cons of natural gas cars.

    www.consumerreports.or...
    Reply
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