Natural Gas Primed to Heat Up

 |  Includes: D, L, XTO
by: James Finch

Investors err in believing summer time is slow for stocks.

When we began coverage on the uranium sector three years ago, an investor could have thrown a dart at any uranium company and made money. Last summer, we began covering the molybdenum sector. Again, investors who were then wise enough to build positions reaped percentage gains of 200 percent or more by speculating on any legitimate molybdenum prospect. Some investors enjoyed gains of 400 to 800 percent on the better juniors.

This summer, we believe another beaten-down sector’s time has come. Who can argue with Beijing’s hottest Saturday in May since 1951? Or twenty-two drunken Muscovites who drowned whilst they were attempting to cool themselves off during a blistering weekend in May?

Whether you believe in abrupt climate change and global warming or not, growing legions of investors are betting in that direction. Whether their bets are placed on wind farms or solar panels, it may not matter much.

We looked to the one sector which has been pummeled over the past 15 months. Most investors have avoided it like the plague.

We believe natural gas is primed to heat up – as early as this month. Best of all: Only a few astute investors or ‘big money’ are paying attention.

On Monday, the holding company Loews Corp (LTR), which is controlled by the billionaire Tisch family, announced it was buying most of Dominion’s (NYSE:D) natural gas reserves – equal to 3.5 trillion feet of natural gas – for about US$4 billion. Texas-based XTO Energy (XTO) bought the balance, paying US$2.5 billion.

On Tuesday, Bloomberg News reported that Canada’s natural gas prices could rise because strong air-conditioning demand would increase gas consumption at power plants.

Nine months ago, one of the world’s leading commodities investors, announced on the Fox News network, “Two hedge funds have collapsed recently, have driven down the price of natural gas. Two things: It's gonna be cheaper to heat your house if you use natural gas; if you don't use natural gas, switch to natural gas. But secondly, buy natural gas, you'll make a fortune.” We have always respected the uncanny eye of Jim Rogers, who admittedly is not a market timer. In July 2006, he told StockInterview, “I’ve sold out every (other) emerging market in the world. I’m investing in China….”

Smart money knows when and where to bet heavily.

Technical chartists are particularly excited about the prospects of a natural gas rally, and more excited about natural gas stocks. The key resistance level is said to be $8.25 MMBtu, about $0.50 away from the current Henry Hub Natural Gas pricing. Some are forecasting a breakout between 40 and 50 percent higher - once it crosses through the resistance ceiling.

The Amex Natural Gas Index [XNG] has been making higher highs and higher lows since mid January of 2007. Nearly always a bullish sign.

And finally, Mad Money’s Jim Cramer predicted this past Monday, “Natural gas is back. People don't understand that. Natural gas is the place to be again. ... We're going into hurricane season…” When the loud mouth shrieks, it might be time to pay attention. Rarely have there been two named Atlantic tropical storms in May.

While this may or may not portend what ‘weather events’ could transpire later this summer, we just had two named storms in May. The 2006 summer was predictable. Just as the stock markets are closing and the Florida rains start (during July and August), a hurricane season could be light or negligible.

When May and June is super hot, with drought restrictions, sea water is warmer and a breeding ground for hurricanes. We’ve had severe drought restrictions in our area. Hence, we think Cramer and other forecasters are calling it on the money.

When the big money throws darts at the natural gas dartboard, then the mainstream pays attention – and the retail investor follows.