Since March the number of shares outstanding in the United States Natural Gas (UNG) exchanged-traded fund have surged 260%, from 37,500 to 98,000. At the same time, interest in the equivalent crude oil ETF, the USO, has dropped 39%, from 157,800 at the end of February to 96,100. Thus, last week equal amounts of bets were being placed on both commodities, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin.
Each week, we publish ETFMarketIntelligence: FOCUS on Energy. As noted in the report, just as we saw in February in the oil ETF, the flood of money into the UNG has undoubtedly helped to establish a floor in the NYMEX market – regardless of extant weak fundamentals – and is now propelling the market higher. To wit, with natural gas’s strong performance last week, we imagine that will serve to attract even more funds into the UNG, et al.
That makes sense. Given WTI’s push towards $60 (and beyond), natural gas – regardless of extant weak fundamentals – is cheap. So if you are a passive investor and you want to play the energy trade, then buying gas in our book makes a lot more sense than punting WTI. For instance, since April 27th, the former for July delivery has risen by 12.8%, while the latter has jumped by 24.4%. Nevertheless, this is still one of our favorite trades. That is because WTI, relative to gas, remains overbought. As we noted in Friday’s issue of The Schork Report, this cross-commodity play broke through support at a nearby trendline last week and is now threatening longer dated support.
The Street is drunk on its own Kool Aid: Less bad was good last week… that is, if you’re of the mindset that a half-million people losing their jobs in April is good.
What has been extremely frustrating over the current run in equities, and therefore, energy, has been the perverted notion that market stabilization is somehow synonymous with demand, i.e. the so called “V shape” recovery.
We enumerated our view in last Thursday’s issue of The Schork Report. The Street is drunk on its own Kool Aid and now has convinced itself the recession is over… despite the fact the White House’s chief economist does not expect positive job growth until 2010.
Two months ago, traders were buying equities because they wanted to “participate” in the equities rally before the bear market resumed. In other words, they did not believe the fundamentals justified buying, but the market was rising so they hopped onto the bandwagon for the ride. Now that the market has risen (the S&P is up 40% from its February low), these same traders are now coming into the market with 20/20 hindsight and spinning a dubious fundamental case, hence the less bad is good mantra that all the fashionable market commentators have been parroting for the last two months.
What started out as a bear market rally in equities back in March has now morphed into a full fledged rally. Skeptical money mangers, disgruntled and dismayed that they missed this run-up are now reluctantly piling sidelined dollars into the market so that they too can “participate." The bullish view on equities has provided a significant uplift to energies, WTI in particular, as some of the money pouring into the market is finding its way to the NYMEX. As such, the NYMEX and the ICE have a vested interest in rising oil prices. Therefore, you have to follow the money.
On Friday night, I debated an individual on the Kudlow Report who actually put the notion on the table that $300 oil within the next 12 months was possible. We were (and still are) incredulous. However, we appreciate that anything is possible when it comes to markets. After all, as Keynes noted… markets can remain illogical longer than you can remain solvent. Be that as it may. You have to ask yourself, who benefits more from $300, OPEC or the NYMEX/ICE? For instance, $300 or for that matter, $147.27 oil (the NYMEX record) surely diminishes OPEC’s market share. On the other hand, it does wonders for the NYMEX’s clearing fees.