Buy or Sell This Week's Natural Gas Rally?

After almost 30 days of trading almost straight down, natural gas rallied up 30% last week – could this be the REAL rally investors have been hoping for, or is it another headfake?

Unfortunately, I believe that the type of big moves we saw in natural gas price this week is indicative of bear market short covering rallies more than anything. The October 2009 contract for natural gas in the US was US$2.51/mcf last Friday, and today (Fri Sept 11) it closed at $3.25/mcf. Canadian natural gas (Sept contract) priced at AECO jumped from CAD$2.25 - $3/mcf from September 4 to September 11.

And several natural gas several stocks had great runs. As equities do, they started pricing in this week’s run in natural gas a few days early - last Friday. Vero Energy* (VRO-TSX), which has more analysts covering it than any other junior gas producer on the TSX, jumped from $3 - $4.43 this week before settling at $4.04. (It has the best jumps on the bear rallies!)

Many other gas stocks were up 20-30%, including the debt-free natural gas producer that I alerted my subscribers to in my most recent issue.

Even when natural gas prices dropped hard on Friday, many producers continued to rally.

I expected this kind of sharp rally in my Aug 17 article – “I see that many, many investors are willing to jump in hard and fast into beaten down natural gas stocks with any good news. I think a lot of stocks will have big moves in 1 or 2 days if and when a positive injection (i.e. low) number comes in, but the real question is - is that that time to be a buyer, or a seller?”

The good news for the bulls is that natural gas supply is dropping. Canada is producing more than 1 bcf/d LESS than last year, due to natural well declines and a reduced rig count. There are also reports that many producers are now shutting in even more wells.

The bad news is that it isn’t making much difference – yet. This week’s 65 bcf injection was not a positive sign. Yes it was less than expected, but still too much to prevent full storage and industry wide gas shut-ins before the end of October.

James Williams of WTRG Economics says that weekly natural gas injections over the next two months need only average 24.3 Bcf / week to match the 2007 record. Over the last 5 years, even with the negative impact of several major hurricanes, injections averaged 61. (His weekly oil and gas updates are great and only US$79/yr – www.wtrg.com).

Other points for the bears include:

• No increase in industrial demand in the US for natural gas. When I look at the weekly oil reports, in the distillates section, which is energy-speak for heating oil and diesel, I see stockpiles are high and rising.
• 3 new LNG import terminals in the US, and one in Canada, this year. And liquid natural gas is being imported for less than US$4/mcf.
• For Canadian gas producers - a rising Canadian dollar, squeezing cash flows even more.

For all that however, the stocks don’t lie. And the AMEX Natural Gas Index is in a clear uptrend. So for investors, our time is getting close. I just think these stock will come back – especially the Canadian ones, which all have a lot of debt.

That makes it difficult for me to invest in many of my favourite junior and intermediate producers. The banks who are owed that debt lent it out under very different circumstances – everyone saw the gas price staying high and the Canadian income trusts buying them out. Now everyone sees the gas price staying low and the banks want their money back. So any increase in cash flow will go towards lowering debt, not growing the company (or its stock price).

And to top it all off, Canadian securities firm National Bank said in a September 10 report said that gas stocks were pricing in a Canadian natural gas price of CAD$4.65 already.

On the positive side, back in 2001 when gas was this low, equities priced in a rise in prices some 6 months in advance. If you look at the AMEX Natural Gas Index, it is clearly in an uptrend. So maybe that was the bottom. Certainly the chart on the TSX listed natural gas ETF, GAS, indicates a capitulation bottom last week.

But I’ve said that before. And investors were wrong in June of this year when the US natural gas ETF received so much volume on hopes of a recovery—only to be disappointed.

I gave subscribers three natural gas weighted producers to start watching—and they did well this week. But for myself, I am still waiting to be a buyer.

Disclosure: I do not own Vero Energy.

Comments

[basehitz:]

I agree with your assessment. A couple of additional points:

1) On Canadian stocks rallying, it seems anymore the only thing a stock needs to go up is a ticker. (e.g., the zombie companies AIG FNM FRE became favorites in spite of their viability being totally dependent on the generosity of the taxpayer and mismanagement of many.)
2) I’m estimating we hit storage capacity by mid-October.
seekingalpha.com/user/...

Many are watching for what should be a very good trade. The question is when. Assume we approach storage capacity too early. Then I suspect there will be a washout concurrent with recognition of that fact. It will be accompanied by extreme volatility on NG pricing. For anyone who still watches CNBC, they will be giving “expert” advise, as always too late and only after their viewers were hurt by many premature buy calls. (Cramer was recommending it at $7. Fast Money was recommending it at $5. It’s now $3. I don’t watch these morons, nor could give a crap what any of them think. The point is, the only useful signal they will give will be to get all in panic that NG is in a crisis and they will be scared and wrong. That is a buy signal. The blogosphere will keep us up to date so you don’t even have to watch these useless morons to know how they are misleading their viewers.)

For added complexity, the huge UNG fund just Friday deciding to issue new shares after essentially being a closed-end fund trading for a premium. It traded down hard AH on volume. And Sep 14th starts their roll period. We also have extreme contango.

This will be a very exciting and tricky period.

Sep 13 08:46 AM

[one eye:]

You can lead a horse to water but you can't make him drink it.

I own shares of the LNG terminal which is going to receive 2 of those shipments. They are going to store that gas, just like those Oil Tankers somewhere on the High Seas, and Ship it back out during during the Winter when prices are higher.

The Storage Capacity of the Facility is 16.8 Billion Cubic Feet.

The LNG market has the following going for it:

www.reuters.com/articl...

Sep 13 09:04 AM

[Ferdinand E...:]

Very interesting article and comments. This storage thing is especially interesting, because as far as economics textbooks are concerned, it is a non-issue.

Sep 13 09:34 AM

[one eye:]

Ferd E, You are a nonissue, you have yet to answer a simple question: What comprises the Oil Equivalents that are Part of the Oil Production Figures?

Anyone of My students could answer it, This "storage" thing, If you can't answer the above, I can understand why you would have a problem understanding The Economics of this Storage "thing".

I found out a long time ago that you do not read German. When Conan swore at you in German, you didn't understand a word.

Where did you say you taught?

Sep 13 11:19 AM

[one eye:]

BTW Fred, what Economics Textbook refers to Nat. Gas storage in the first place?

Sep 13 11:25 AM

[Mayascribe:]

@ basehitz: "I find television very educational. Everytime someone turns it on, I go in the other room and read a book." --Groucho Marx

Sep 13 11:42 AM

[tireman63:]

On a purely local level, the natural gas storage phenomenon is responsible for the 4th Spindletop oil boom here in Beaumont. The first was the Lucas Gusher in 1901, the second with Yount-Lee Oil in 1928, the 3rd was with Texas Gulf Sulphur years later, and today with the hollowing out of the salt dome caverns for NG. It may not be as dramatic as the 1901 gusher, but the money is still welcome.

Sep 13 07:07 PM

[one eye:]

tireman63: If storage was an Economic non-issue, our Strategic Petro. Reserve is a Really, Realy big Non-Issue.

Its been tapped a number of times, each time because it made Economic Sense at the time.

Sep 13 10:15 PM

[Nettligent:]

Natural Gas Industry is Pump & Dump, speculative, high risk, overvalue.. Outlook is not good until 2010 or economy sign of recovery, whichever comes first.

Sep 14 04:24 AM

[JoJo69:]

Hmm, Do you think that we can see November contract again about
$ 2.40 ? I don't think so.
Eleven days Bull market on Natty which I never seen in my live, gain over 65 % from $ 2.409 to $ 3.900.And EIA alredy has expected about 3.842 Billion Cubic Feet Nat. Gas to end of October/2009 (highest level of Nat.Gas in storage ever) even if it's higher than 3.842 Billion Cubic Feet so what? I think that it will hit 3.999 Billion Cubic Feet to 5th November/2009. However from August/09 storage capacity is 4.3 Billion Cubic Feet in USA.
Goldman Guys said Game is Over, and no more Gas below $ 5 for winter contracts.
www.bloomberg.com/apps...

Sep 19 02:41 AM

[JoJo69:]

Because of stupid SHORT speculators who had sold futures betting that prices would fall bought contracts back to cover those short positions, Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in an interview on Bloomberg Television.

Speculative short positions outnumbered long positions by 173,866 contracts in the week ended Sept. 15, up 3.1 percent from 168,629 contracts a week earlier, according data released today by the Washington-based Commodity Futures Trading Commission.


SO CURRENT NOVEMBER CONTRACT WILL GOING FROM
$ 4.82 to $ 6 till Oct/02/2009. AND after that will see pull-back about $ 3.50.


www.bloomberg.com/apps...

Sep 19 03:31 AM

[JoJo69:]

Well, what do you think about collapse of Nat. Gas prices today?
Nov. contract hit new high $ 4.852 and Oct. contract $ 3.942.
Weekly Storage report from EIA hit 3,525 bcf.
And they had expected storage should be 3.842 bcf (highest level ever). Little bit confused?
Yep, just watch till Nov/09 when storage will hit over 4.000 bcf and Nat.Gas price over $ 6.00. ( Excuses : Lower Dollar, Less supply, expectation of cold winter, Bullish stock market etc.)
Manipulation in the USA markets, forever.
Any comments..

Sep 24 12:08 PM

[JoJo69:]

"Unfortunately, I believe that the type of big moves we saw in natural gas price this week is indicative of bear market short covering rallies more than anything".
Ouch, Nat. Gas just hit $ 3.999 (Oct/09) and $ 4.919 (Nov/09).
Please, answer about UNG. Would you short Nat. Gas November/09?
I think that you and mr.King ,that you don't have a clue about Nat.Gas.

Sep 24 01:57 PM

[JoJo69:]

Well, Mr. Schaefer where are you?
Not active any more? I'm suprised too, 3 weeks bull market of Nat.Gas. Today again new highs Oct/ $ 4.035 and Nov/ $ 4.990...
I think Oct.1th/2009 will be turning point down.
And I can expect Nov/ $ 5.120 to 5.420. Any comments?

Sep 25 02:07 PM

[JoJo69:]

Well, Mr. Schaefer where are you?
So did you see today on the market?
After annocement of EIA that inventories are up 69 bcf.

Again Nov/09 NG hit $ 5.045. The biggest inventory in history 3,658 bcf and,and weekly Producting again up 24 bcf. Production is still going up. SO?
You and mr. King, you don't have a clue about NG.

Oct 08 11:30 AM