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Remember that every large loss a trader has, was at one point a small loss...
- Michael Levin |
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Today's Featured Article
Hello traders, I haven't written a directional piece on any commodity in a while. I seldom like to take a directional position as I normally rely on sophisticated systems to do number crunching for me. However, when I find something I really like, I don't mince words I just come out and say it:
I like Nat Gas right here under $3 MCF on the October contract and I think it has a few nice short covering rallies ahead.
Too many people got long around the $3.75 area thinking a hurricane or two might pass by the Gulf area or that it had fallen enough or had support around that level ($4) there and I'm here to easily point out, that it didn't old (support) and that the longs have gotten crushed, this month in particular.
Even one of the best automated systems I know of for the Nat Gas contract has gone sideways to down a bit on this one the past month, and that's hardly usual. I do depend on that system for most of my shorter term trades, even started stepping into the Nat Gas ETF on the NYSE, symbol UNG $10.72 at Mondays 8/31 close (albeit at higher prices the past week).
So why is it that we aren't hearing from fundamentalists on how "cheap" Nat Gas is at these levels?
I mean really now, look at the long term decline since the run up last May through July to $12 and nothing but slip-slide all the way down to where we are now:
 If you cannot view the above chart, go here.
It doesn't take a genius to start looking at a chart like this with how "green" our country says it wants to be and realize that maybe Nat Gas isn't as expensive as it used to be and is almost the opposite of what happened when everyone piled on the corn/ethanol play.
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Back only 2 years ago as Oil/Gas prices started their run up, Corn went from $2.50 a bushel all the way up to $7, squeezing the costs of prospective ethanol plants to the point of unworthiness and failure of their projects before the plants were even built. Here's a chart to remind you:
 If you cannot view the above chart,
go here.
This seems almost too good to be true right now, as we are looking for a cleaner burning fuel that we (the US) have in abundance on our shores and it is getting cheaper, as Oil prices have turned from under $35 (for earlier contract months in 2009) to the $72+ range we see now. Look at what some might call a "cup and handle" formation lately. This weekly chart shows that it did make a nice bottom and if you look at the absolute lows, they occurred on a gap down to new lows, exhausting those who had held and establishing an excellent trading low that ripped over 60% higher ($46 to $74) from that point in only 4 months:
 If you cannot view the above chart,
go here.
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In looking at picking the lows for Nat Gas, we see this picture of the October 2009 Nat Gas contract below $3 MCF. Notice the decline from around $4.38 to under $3, a move of 32% almost unabated to the downside in just the past month.
 If you cannot view the above chart,
go here.
The Feb 2010 Nat Gas contract is just over $5 at the $5.18 level, down from about $6.05 but not nearly as bad as the move in the October contract. This may have a little downside here, but these declines don't last forever, there are real uses for Nat Gas here and everyday it stays low are days where savvy energy companies put their gear to work to extract this commodity at the cheapest prices they can.
 If you cannot view the above chart,
go here.
This excerpt from the EIA (The US Energy Information Administration) May 2009 tells the story for consumption and the "greener" aspect of Nat Gas vs. Coal or Oil:
Worldwide, total natural gas consumption increases by an average of 1.6 percent per year in the IEO2009 reference case, from 104 trillion cubic feet in 2006 to 153 trillion cubic feet in 2030 (Figure 33).
With world oil prices assumed to return to previous high levels after 2012 and remain high through the end of the projection, consumers opt for the comparatively less expensive natural gas for their energy needs whenever possible. In addition, because natural gas produces
less carbon dioxide when it is burned than does either coal or petroleum, governments implementing national or regional plans to reduce greenhouse gas emissions may encourage its use to displace other fossil fuels.
This is a telling factor when choosing an alternative to Oil AND having this be cheaper and cleaner burning makes Nat Gas an excellent choice for not only the individual trader to start looking at the long side, but also the consumers of Nat Gas like power plants, Industrial sources and the movement s like T Boone Pickens with Auto's...
Here is that chart on consumption, referred to as Figure 33:
 If you cannot view the above chart,
go here.
There are many other factors worldwide that I believe will push prices higher over the longer term that I don't have the time or space to get into with you, just read the webpage from the EIA that I chose the above paragraph from: www.eia.doe.gov/oiaf/ieo/nat_gas.html
It truly is worth the 10 minutes to see what they say about not only demand, but where the Nat gas is produced outside of the US (mostly Iran and the former USSR) and then look at how small a % Nat gas is currently used in China and India (but with a huge possible demand as a secondary source of energy aside from Coal/Oil)
My prediction is that you will see Natural Gas back up in the $7 range early next year and if any hurricanes threaten our supplies in the Gulf, a short-term spike to $4 isn't out of the question.
All the best in your trading and no matter what, pick your "Uncle point" and get out when the market shows you that your position isn't in sync with the current movements the market is making.
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About the Author
Michael Levin
is the President of Genuine Trading Inc. He has been in the financial markets since 1981, having been a broker and trader on the PHLX Equity Options floor in the 1980's and ran trading firms in New York in the 1990's to 2002. He has been interviewed by the NY Daily News, Philadelphia Inquirer, Philadelphia Daily News, Chicago Sun Times and the Yomouri Shinbun (Japan's largest Daily) Michael has also had 4 feature stories in Futures Truth Magazine (2 were Featured Cover Articles) as well as over 20 plus articles in the
archives of www.FutureSource.com |
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