Traders Turning to Natural Gas

By Chris McKhann

There was plenty of talk yesterday about the gap between oil and natural gas, and it attracted the option traders.

Oil has been much discussed in the press as its price has rebounded sharply, but the fact that natural gas has not been doing the same garnered attention yesterday. Traders may not want to play the futures, but they can use options in exchange traded funds such as the U.S. Oil Fund (USO) and the U.S. Natural Gas Fund (UNG).

The UNG options had 148,000 contracts turn over yesterday, more than twice the 20-day average, and presumably driven by all of the talk of "underpriced" natural gas.

The USO has roughly followed course (or the lead?) of the equity markets, as it has climbed from a low of $22.74 back in late February to its current price of $37.69, its highest close since December. UNG, on the other hand, hit its low of $12.69 on April 30. It has been rallying but closed yesterday at just $14.57 after posting a lower high last week.

The theory is that natural gas will have to rebound with oil, and some are using options to make that play. Of course, even if the thinking is correct -- which it hasn't been so far -- the timing could be dangerously off, especially when using options.

Comments

[zorro6204:]

The theory is nuts! Gas is almost exclusively domestic, certainly the pricing is. Oil is a world commodity and is affected by movement in the dollar. This disconnect is only such in historical terms, but the recent gush of U.S. gas supply combined with maxed out storage and minimal demand trumps all that.

Jun 05 02:13 PM

[buyforeclos...:]

zorro hit it on the head...there is a REASON for the dislocation. NG supplies just here in the US are huge and will last for a VERY long time. You can't say that about oil. Oil will run out a century before NG is ever in danger. I expect NG to get back to the 3.40 3.50 range and if the canadians are right it will go lower thsi summer. But at 3.50 I am willing to go long and hold it into higher demand winter where we may see $5 + and a nice profit. UNG was at buy in the mid to low 13's and I will wait for the pullback. Its low was 12.69 and it could retest that this summer

Jun 05 02:46 PM

[tunaman4u2:]

I was a buyer on Thursday at 13.59... NG has a funny way of falling back. I held UNG a few weeks back & was up 20% before I lost it all in 2 days. Volatility is crazy. I'm not concerned so much with retests in UNG as opposed to the retests of the actual commodity... I does seem that 3.20 isn't coming around again though as the worst inventory reports can't drag us there


On Jun 05 02:46 PM buyforeclosures wrote:

> zorro hit it on the head...there is a REASON for the dislocation.
> NG supplies just here in the US are huge and will last for a VERY
> long time. You can't say that about oil. Oil will run out a century
> before NG is ever in danger. I expect NG to get back to the 3.40
> 3.50 range and if the canadians are right it will go lower thsi summer.
> But at 3.50 I am willing to go long and hold it into higher demand
> winter where we may see $5 + and a nice profit. UNG was at buy in
> the mid to low 13's and I will wait for the pullback. Its low was
> 12.69 and it could retest that this summer

Jun 05 04:22 PM

[hipway:]

contango......

Jun 05 08:34 PM

[tunaman4u2:]

its a bitch


On Jun 05 08:34 PM hipway wrote:

> contango......

Jun 05 09:25 PM

[Phil77:]

what could the possible down side on NG be? $3.50? $3.25? It's not going to zero. At some point, the price will be too low for drillers. They would rather shut down a drill than lose money on the gas they are selling. Thus, decreasing supply and raising prices. So if the downside on NG is $3.25 or so, which is a 15-30% drop, can we say UNG has a similar downside potential of 15-20%? at $12.00 or so? And how long could that low be actually sustained before supply starts dropping off and demand starts increasing, thus raising prices?

I am long 8500 shares @ $13.85

Jun 06 02:57 AM

[pockyclips ...:]

It's too darn bad that we would rather contribute to the Taliban Terrorism fund instead of using a reliable, cleaner resource. Once the infrastructure is set up, the transition to hydrogen would be a lot easier.

Jun 06 11:43 AM

[H. T. Love:]

I'm new at this stuff, so if you visit the link below, be suspicious.

If I had to guess, I suspect we are temporarily in a trading range of $13.50-$16.00. However, it may now have resistance around $15. Since volume has been good, we could give it some weight. But we need to see what happens when the dollar stabilizes a bit.

seekingalpha.com/insta...

HardToLove

Jun 06 11:55 AM

[H. T. Love:]

On Jun 06 02:57 AM Phil77 wrote:
><snip>
> So if the downside on NG is $3.25 or so, which is a 15-30% drop,
> can we say UNG has a similar downside potential of 15-20%? at $12.00
> or so?

I'm new at all this, but have been recently investigating this for additional investment/trading. My take is if we get any kind of a bounce up, even intra-day, take some profits.

Again, I'm a n00b, so be suspicious of my thoughts on it.

seekingalpha.com/insta...

> And how long could that low be actually sustained before supply
> starts dropping off and demand starts increasing, thus raising prices?

Supply has already started dropping off. But as of last month, only 54% reduction in operating wells had been achieved off the very large numbers of operating wells developed over the last couple of years. With calls for milder hurricane season, continuing economic deterioration, pressure on the consumer (raising thermostats in summer, lowering in the winter), congress/BHO apparently favoring liquified coal over NG (congress working on energy bills now, so with luck that will change), ... I think demand will be slow to develop.

Your 15-30% might be too conservative, or not. But I believe, for the near-term, it really depends on how much more pain the producers can withstand. There are some long-term developments that *might* come to fruition a couple years out. Then a really big demand can come into play.

>
>
> I am long 8500 shares @ $13.85

Really long-term, I think that's not bad. Short-term, you're tying up capital that might be more productively deployed. If, like me, you have a tendancy to wnat to support your biases ("green energy"), you may be investing emotionally. I have to really watch myself on that.

HardToLove

Jun 06 12:39 PM

[MikeyLV:]

With regard to options, the question is if the January 2011 date gives enough time for a profitable move.

Jun 06 12:39 PM

[dmz50:]

We need to use OUR ng instead of THERE oil, damnit. Wheres all the smart people in this country besides T Boone Pickens.

Jun 06 05:39 PM

[H. T. Love:]

I think one needs to wait to see what's in the energy bills the congress is crafting now. There's a committee working this week and, if I recall correctly, another the following week. They have different portions they work on and I can't recall which is doing what.

HTL

On Jun 06 12:39 PM MikeyLV wrote:

> With regard to options, the question is if the January 2011 date
> gives enough time for a profitable move.

Jun 06 06:40 PM

[H. T. Love:]

You'll enjoy thisone: on today' Seeking Alpha mailing is a fellow recommending we invest in a Chinese NG company.

I resisted the urge to post anything - I'm sure it wouldn't have been very constructive if I had posted.

HardToLove


On Jun 06 05:39 PM dmz50 wrote:

> We need to use OUR ng instead of THERE oil, damnit. Wheres all the
> smart people in this country besides T Boone Pickens.

Jun 06 06:42 PM

[Bluechippie:]

Someone start a petition for the country's public transport system to be running on NG instead of oil. Capitol hill has to wake up and act decisively. Hail Pickens

Jun 06 09:39 PM

[drooyrich:]

Trqnsport system on NG ? Thats what we are already doing in europe; sales of private cars equipped with NG have gone up by 75% last month in Italy; I am long NG through NHU.TO and plan to add as soon as the 4.5 on the nymex contract...technicals are incredibly bullish (never seen so much technical bullishness in a stock) - see you at >6 for a >200% profit

Jun 07 12:31 AM

[H. T. Love:]

Best we keep the "federales" out of it! They screw everything up. Local initiatives are the way to go. This has already begun in several major municipalities, Phoenix AZ metro area being the one that comes to mind at the moment. There are others.

Further, there are other initiatives underway in the public/private sector that are already implemented or currently under deployment that replace gas/diesel with NG.

In my opinion there is a good chance that this is going to spread rapidly over the long term. Short-term, I'm bearish on NG because of the stress of economic conditions. Change takes initial investment and a focus on the issue. Right now the money is not going to be available and the focus will be on more pressing issues.

HardToLove


On Jun 06 09:39 PM Bluechippie wrote:

> Someone start a petition for the country's public transport system
> to be running on NG instead of oil. Capitol hill has to wake up and
> act decisively. Hail Pickens

Jun 07 03:16 AM

[Ellito:]

pockyclips 2020,
You are right, Hydrogen fuel is the future bet.
China is now letting Greenchek Technology Co to set up
manufacturing facility in their backyard right now.
Greenchek Technology (GCHK) is specialized in Hydrogen fuel etc etc. Won't be long the USA will be behind in this field again.
Even Canada is talking about this subject now.

Jun 07 05:33 AM

[Maxe Paul:]

Honestly i think trading NG is more painfull than a Dentists appointment, it hurts more when your wrong and damn it costs you $!

SA WARNING, AVOID AT ALL COST.

Jun 07 09:38 AM

[elliot_mllr:]

There is a better alternative than buying or shorting UNG or the actual gas futures. If you are concerned that we will have a surplus of gas for some time why not buy a gas storage MLP such as Inergy (NRGY) which also sells propane and has a very nice yield? Or if you think that prices and therefore drilling will increase why not buy mid-stream MLPs which transport and process gas (ETE,ETP, EPD, CPNO, etc.) and provide a nice yield?

Jun 07 11:35 AM

[Ellito:]

elliot_mllr,
agree with you 100%.
very good suggestions.

Jun 07 02:57 PM

[Go_TBPickens:]

OKS. Love the dividends. This is a domestic company that has solid financials, it has been very good for us. They are continuing to expand even in this economic climate.

Jun 07 03:25 PM

[Shale Gas:]

UNG is indicated at $14.04-14.05 this morning, down $0.51 or 3.5%.

Jun 08 09:18 AM

[iansane:]

Its HNU.TO not NHU

Regards,Ian
On Jun 07 12:31 AM drooyrich wrote:

> Trqnsport system on NG ? Thats what we are already doing in europe;
> sales of private cars equipped with NG have gone up by 75% last month
> in Italy; I am long NG through NHU.TO and plan to add as soon as
> the 4.5 on the nymex contract...technicals are incredibly bullish
> (never seen so much technical bullishness in a stock) - see you at
> >6 for a >200% profit

Jun 09 10:13 AM

[H. T. Love:]

On Jun 07 11:35 AM elliot_mllr wrote:

> There is a better alternative than buying or shorting UNG or the
> actual gas futures. If you are concerned that we will have a surplus
> of gas for some time why not buy a gas storage MLP such as Inergy
> (seekingalpha.com/symbo...) which also sells propane and
> has a very nice yield? Or if you think that prices and therefore
> drilling will increase why not buy mid-stream MLPs which transport
> and process gas (ETE,ETP, EPD, CPNO, etc.) and provide a nice yield?

Two things: MLPs at tax time cause more work, *but* there is a tax advantage, if I understand correctly. Dividends are counted as return of capital until you investment amount has been returned. Thereafter, they get the dividend treatment.

I'm not a tax professional, so be sure you do DD of your own. OH! And if you are trading in an IRA, you don't get this tax advantage, but I would *guess* you wouldn't have the extra tax filing paperwork.

The ones I've heard recommend that seem to really know suggest using it in a non-tax-advantaged account so that you get the benefits of the MLP treatment.

HardToLove

Jun 10 03:31 PM

[naidle:]

I like Nat Gas. There's over-supply and the US has fallen off a jagged cliff but at the end of the day it's overshot on the downside if you believe in the inflation story.

Even if you don't, the growth of China will undoubtedly be positive for NG. Why? For China to grow it needs resources which Canada has aplenty. Potash, Oil Sands, Petrochemicals etc all need Nat Gas as a fuel for production.

We may not ship the stuff directly but that's not quite the whole story.

Jun 10 11:54 PM