Monday, June 8, 2009

Will Next Energy Trade Be Natural Gas?

A small but increasing number of Yahoo's SKF board members are taking long positions in natural gas. I do not know whether they are investing in a natural gas ETF (UNG) or futures contract or natural gas exploration companies like Chesapeake Energy (CHK) or XTO Energy (XTO, my favorite for some reason), or integrated oil majors with significant gas portion in their business like Conoco Phillips (COP).

I have a Canadian natural gas trust fund in my non-trading account, which at one point was down over 85% from the peak. Now it is only 60% off the peak (ha!).

So, with skepticism, I took a look at the chart of natural gas (continuous futures, NYMEX). Well, well. If I were to pick up natural gas here, it would probably be very close to buying at the bottom. It has broken out of the severe downward channel to the upside. It may still backtest the upper trendline, making a new low. But it is hard not to imagine it is very close to the bottom.

The tricky thing about natural gas is that nearly 50% of usage is for industrial and commercial, whereas 70% of petrolium usage is for transportation and only 25% for industrial (see my post in the other blog). We are in the deepest recession since the Great One, we are told, and businesses are cutting back on all fronts. No wonder natural gas just kept going down.

But if and when the recession is over and a recovery, however tepid, comes, we will likely have natural gas shortage. It will be a longer-term play, but if natural gas catches up with oil (just like silver is catching up with gold), the gain can be much bigger and faster. While we wait for the recovery, price inflation resulting from monetary inflation that the government is intent on continuing will probably help the natural gas price. It will at least put the bottom, I think.

A natural gas commodity ETF, UNG, is currently vastly underperforming gas companies like CHK and XTO. However, crude oil ETFs were underperforming oil companies for some time even after the commodity price hit the bottom.

I hope the economic recovery, no matter how late in coming, won't be an L-shape recovery. (That will be no recovery, won't it?)

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