Natural Gas on Track for a Seasonal Low

 |  Includes: CGC-OLD, DGAS, NWN, PEIX, PNY
by: Greg Silberman

Natural gas future prices are on track for a seasonal low in September. As a result, natural gas investments look set to be the next energy cab off the rank.

Our recent articles on the energy markets have generated lots of feedback.

In Oil Stocks lagging Current Crude Oil Prices we concluded that we were about to see a weaker stock market – which was the case.

In Uranium Mining Stocks grossly under perform Oil Stocks we tackled the issue of why Uranium stocks were severely lagging Oil Stocks.

But it doesn’t end there!

The energy markets are a conglomeration of different energy sources whose fortunes have been severely mixed.

We dealt with the uranium craze in the above article but take a look at the US sanctioned ethanol madness:

Chart 1 - Ethanol madness

Pacific Ethanol (NASDAQ:PEIX) rose over 400% between October and April and then fell off a cliff (along with ethanol prices).

Pacific looks like it is trying hard to find a bottom at $12.

Coal was also the go to man early on in the energy cycle:

Chart 2 - vicious correction in the DJ Coal Index

Around the same time as ethanol was doing its thing, coal prices mounted their own surge higher. And as with ethanol, May proved to be coal's nemesis as the index lost over HALF its value in the preceding correction.

It looks (to us) like the Coal Index formed a bottom at 225 – 250.

And the best for last – natural gas. First let’s take a look at the commodity itself:

Chart 3 - Natural Gas Prices got clobbered from $15 to $4.53 - looks like a seasonal bottom

Natural gas had a spectacular run-up in 04 and 05 but that ended abruptly in 2006 as the price CRASHED from $15/mmbtu to $4.35 in September 2007. That’s a fall of 71% which culminated in the multi-billion dollar collapse of hedge fund Amaranth.

Before we move on to look at a chart of a natural gas producer, note how the price consistently bottoms in August / September (2003, 2004 and 2006). In fact natural gas has a seasonal tendency to make its lows around this time -- there is no reason to suspect this year will be different.

The collapse of natural gas prices did no favors for the stocks of natural gas producers. Take a look at this swan dive by Daylight Resources Trust:

Chart 4 - Swan Dive Daylight Resources

Daylight Resources is predominantly a natural gas Canadian energy trust. Canadian energy trusts are producers that distribute all of their income to unit holders. Based on the recent price rout, Daylight now yields an incredible 23%.

The recent swan dive is as a result of:

1. The crash in the price of natural gas 2. Spiraling production costs (common to all producers) 3. An unfavorable tax amendment to the treatment of energy trust distributions (effective 2011).

With so much bad news priced into a sector and with the price of natural gas at a probable turning point, energy trusts such as Daylight may be the gift of the century. You are effectively being paid 23% per annum whilst you wait for capital appreciation to kick in (assuming it will eventually kick in).

Yip, markets can become completely irrational.