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Natural Gas Too Bullish All Of A Sudden? $2.80 Next Stop.

|About: The United States Natural Gas ETF, LP (UNG), Includes: DGAZ

Natural gas has risen to $4 after failing to break below $3 in February. To put in a single sentence, natural gas has woken up the bulls again.

Let us see why bulls are so excited to send natural gas soaring.

1. Rig counts continue to decrease (down 13 this week, though it went up 24 last week)

2. Tightening supply conditions; storage below 2 trillion!

3. Producers cannot make money if natural gas at these low price levels

4. technicals of the chart

However, I am still bearish on this commodity and here's why.

1. Though rig counts continue to decrease, natural gas production is actually increasing

2. While storage is lower than last year, it is still above the 5 year average which is an inflated average (given the higher and higher storage counts as the years go by)

3. Cabot CFO once said that the breakeven cost for his company was below $2; similarly, many reports have shown that the Marcellus region are able to lower breakeven cost to $2.50

4. Technicals are looking in favor of both bulls and bears. The topping pattern that we are seeing in natural gas at $4 is likely to limit natural gas rally. We should see a retest of $3.40 at the least.

5. The spread between forward contracts and spot rates are at lowest levels. This signals that the natural gas rally was due to spot weather conditions and not a long-term event.

6. At $4, many producers are able to purchase hedges at $4.20 forward month and assuming a $4 breakeven cost, they will still make money rather than not.

7. What we are seeing now is retail and bullish speculators pumping up the price, and producers selling into the rally to hedge their drilling plans.

This is the end of the natural gas rally in my opinion. Though we can expect more withdrawals towards the end of the month, we are seeing a steep decline in utility demand for natural gas. And as spring comes, we will see a sharper increase in natural gas storage compared to the year before.

To take a speculative bearish play, I recommend buying DGAZ for a levered play.

Or buying puts of UNG and selling calls.

Disclosure: I am long DGAZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.