Natural Gas Burn
Research for Online Investors

by John Dalt

2/22/10

Trading natural gas is like playing with matches, you can get burned.  We have traded natural gas in the SwingTrader service for the last year.  It can move so fast, and erratically, it is easy to get caught in a losing position.  The underlying truth to trading any commodity is that it cannot go to zero.

We know the commodity has value, and will increase or decrease in value based on supply/demand.  This makes short term trading safer, in that we know over time the commodity must return to a value that allows it to be supplied in quantities to meet demand and allow the producer to make a profit.  Too bad we are still waiting on natural gas to return to its value on some short term trades that are getting old.

Natural gas trades on the storage reports that come out every Thursday.  Natural gas storage is the sponge that holds extra gas from the transportation pipelines or releases gas to the pipelines when demand outstrips supply.

Natural gas is treated at the wellhead to remove some impurities, and then flows into gathering pipelines.  The gathering pipelines deliver the gas to a processing plant for treatment before it is suitable for use as “pipeline quality dry gas.”  The processing removes fluids (oil and water) and other gaseous products such as ethane, propane, butane, and pentanes.  Many of these products have value and can be sold separately.

Traders watch the storage reports to determine the supply/demand balance.  Here is last week’s storage graph.

The red line is current natural gas in storage, depicted in a band of the last five years averages. Natural gas storage draws down into the spring, and then builds back up through the summer for the winter season. We can see gas storage bottomed in March for the last two years, and then started climbing back. Industrial demand for natural gas was down 9.3% in the first eleven months of 2009, when the credit crisis stopped much of the economy, and new natural gas wells came on line. We can see the red line stayed in the top of the five year average and led the storage up. In 2008, the red line was on the bottom of the five year average, following the storage up rather than leading it. Which will it be this year?

Storage last week decreased 190 billion cubic feet (bcf), placing it 1.3% above last year’s level and 2.7% above the five year average.  The storage reports are for the previous week.  The U.S. was covered by snow in 49 states last week.

According to Bloomberg, traders are selling off their positions in natural gas as winter weather ends signaling reduced demand for heating.  Weather forecasts call for warmer temperatures the first two weeks of March.  Drilling rig counts have risen 34% from the seven year low recorded last July, according to Baker Hughes.  This may mean more supply coming on line.

The Philadelphia Manufactures Index jumped last week, indicating health in the manufacturing sector.  Industrial users represent 29% of natural gas usage in the U.S.  Natural gas is used to generate electricity, and at the depressed prices compares favorably with coal, while burning much cleaner.  Natural gas use for electrical generation is up 24% year-over-year.

The National Association of Business Economics (NABE) forecast 3.1 GDP growth in 2010 for the U.S. economy. We believe natural gas will surprise the market this year, recovering much quicker than many believe.  There are two pure ETF plays on the price of natural gas.  UNG and GAZ trade futures contracts; FCG is an index of natural gas service and production companies.  UNG is caught in a depressed price as gas trades for more in the future than the spot price.  As supply/demand come into balance this will work to UNG’s advantage and push the ETF price higher relative to future natural gas pricing.  We could get a price spike in UNG share price on supply/demand tightening.

You can also buy major gas production and exploration companies.  Tops on my list are Chesapeake Energy (CHK), Petrohawk Energy (HK), and Ultra Petroleum (UPL).

Last week the S&P500 was up, this week we expect the trend to continue.  We warned our Long-Term subscribers the Greek credit problem is moved to the back burner to gain a little heat and will be back within the next three weeks to kick us in the shins.

The U.S. is going to have a “health care summit” on Thursday.  Hello?  Let’s spend more money?  Are we trying to catch Greece?

The U.S. must borrow close to $2 trillion dollars in the current fiscal year in new money and rollover of existing debt.  Government figures released last week show that foreign demand for U.S. Treasuries fell by the largest amount on record.  China reduced holdings by $34.2 billion to $755.4 billion.  Japan cut their exposure by $11.5 billion to $768.8 billion.  CNBC reported, Jim Rogers says “China Will Keep Trimming Treasuries.”

George Soros bought $600 million dollars in GLD in December. We all see it; some are ignoring it, to their own peril. Don’t be one of the ostriches with your head in the sand. The administration and congress are bankrupting our country, and we need to protect ourselves. We have a special play coming out Wednesday in the Buy, Sell, Hold Service for our subscribers.

Maobama appointed a ‘debt commission’, which ought to fix things.  The president can go to Nevada and pledge $1.5 billion for states that have the largest housing problems, (Arizona, Florida, Nevada, California, and Michigan) and mostly democrat senators, but have an “independent” debt commission meet next summer to determine what the problem is and how to cure it!

After watching Glenn Beck deliver the keynote speech to CPAC this weekend, I feel like I need to say, “I am a stock trader, and I have a problem!”  If you missed it Saturday afternoon, you can watch him WOW the audience.

T he information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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