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Natural Gas Price Collapse in the Face of More Snow and Cold

What took nearly 3 months to achieve (50%+ move up in winter natural gas prices), from one of the coldest U.S winters since the early 1980s, was given back in less than 3 days. In one of the most volatile, whip-sawed commodity markets in recent memory, March natural gas prices took it on the chin this week, in part due to simple "winter end" profit taking, and the fact shale production increases will come back to haunt this market, in the months ahead. We also have the "potential" for El Nino to form this summer or fall and if so might suggest a more normal to cool summer and limit the hurricane season. This, and the expiration of the March contract were reasons for this debacle. Traders who might have read my last report were advised to look into taking profits in natural gas prices, when they were very close to $6.00 just a week ago.

Given market action, I am unsure of the future direction of (NYSEARCA:UNG) at this point, but feel that the upcoming cold March will probably keep the April contract from falling a lot further. But my confidence is not nearly as high, as it was when there was a net short position in the market last November and ahead of my call for a very cold winter.

Extreme cold weather and frequent storms has cost the nation's insurance industry more than $1.5 billion. That number will continue to climb, but I cannot necessarily say the same for natural gas prices.

While Fundamentals are King in Trading Markets, So Is Investor Sentiment and Psychology

Looking at market action and psychology is "key in commodity and equity trading." To quote the infamous Jesse Livermore, one of the greatest market callers ever:

"Old man Partridge's insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing, initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine"

A great book to learn about investment psychology and developing a real "gut feel for markets" is Reminiscences Of A Stock Operator.

(click to enlarge)

Another big snow event (above) on Monday and Tuesday across the U.S. Up to a foot of snow in some areas may get some attention in the heating oil market, and perhaps natural gas. However, other factors, other than the weather are at play in natural gas for the moment, even though the cold weather pattern will continue. Nevertheless, natural gas prices will likely snap back at some point, as very tight stocks will exist heading into summer. So if you are still long UNG, at this point, I guess I would recommend staying long, though most of the bull move has already occurred.

MJO Could Be Key for Some Relief to the Brazilian Drought

The MJO (Madden-Julian Oscillation) -- will be a key factor in "potentially" easing drought conditions, in previously scorched Sao Paulo and Minas Gerias, Brazil, over the next 10 days.

Brazil has been long over-due for a major drought, just as the Midwest corn belt was over-due back in 2011-2012. We have seen the soybean market too have incredible volatility as crops in Sao Paulo and Parana have been reduced due to the incessant dryness. Nevertheless, the soybean market (NYSEARCA:SOYB) has also been watching Chinese demand news, export cancellations and trying to factor in the fact that even with a reduced Brazil soybean crop to perhaps 84-85 MMT (earlier winter estimates around 90 MMT), the fact remains that South America will still produce a large crop.

Irreversible damage has likely occurred to both sugar cane and coffee. However, our advice for now, (just like in natural gas last week), is to look to book some nice profits, if traders went long coffee (NYSEARCA:JO) or sugar (NYSEARCA:CANE)over the last few weeks.

While we have entered bull market territory in both of these markets and the potential still exists for 2014 weather problems, especially if El Nino forms later, the 15% rally in sugar and 35% move up in coffee futures could be enough for now.

The first map above shows outgoing radiation with respect to the position of the MJO the next 15 days. In other words, areas in blue represent clouds and rain, red regions, mostly dry. The MJO is a wave in the tropics and it is NOT always a major driving force in the globe's weather. However, as the second map here on the bottom shows, the MJO will be very strong the next 2 weeks (further away from the center circle the stronger) as it rotates into phase 8 to phase 1 into the south Atlantic.

Source: Snow Storm, Natural Gas Debacle, Investor Psychology And Brazil's Drought