How to Play Natural Gas From Here

It's pretty darned obvious that oil can't rally and that natural gas futures got too high. It's just what happened. The "out of energy into banks" trade seems to have run out of steam, though, because the earnings of the oil and gas companies will be monstrously large and the companies can really take advantage of the declines with buybacks and dividend boosts.

I also know from my good friend Dan Fitzpatrick that the technical levels for all of these natural gas plays are super, and he's the best. I would rather think of the trade as "sell energy, cover banks," as I don't know how many hedge funds are willing to switch direction and now embrace the banks -- I believe most of them believe the whole move is phony. (I don't agree; I think that we are working our way through the crisis and what you are seeing is the end of the 2006 vintage of bad loans surfacing.) I believe that the "out of energy" trade will run its course because the valuations are actually cheap even with these futures declines. If they stay down here, they will be purchased by majors who need growth.

It's the natural gas futures market that is truly in free fall, and it is worth it to discuss how long that can occur given that the stocks seemed to have put in some sort of a bottom. Natural gas is being found left and right in this country. It is in total abundance. But there isn't the capacity to switch to it that is so necessary to keep the price up. The market is saying we could develop a glut given all we are finding. That's a real reason for the endless selling, although at 10 I think it will run out, because the stocks -- which led the futures down -- seem to be signaling some sort of stabilization.

Here's my problem with the inventories, which ballooned last week, as a tell for the ultimate direction of the fuel and the earnings. It is really difficult to store a lot of natural gas, so the storage numbers aren't nearly as important as with crude. We have only increased storage very incrementally in the last few years, so there are not a lot of places to put the stuff. At the same time, it is unlikely to get crushed in price because there's little ability to build coal plants in this country and natural gas is a vital fuel for energy independence. There's not enough natural gas to be shipped here, so it is unlikely that a glut will last too long.

But natural gas has no champions in this country. The politicians aren't talking up how it is cleaner and better than coal or oil. The big plants that use coal aren't about to be scrapped for natural gas. Homeowners aren't going to switch over, as most already have. Without brand-new uses and with a season that historically has not brought about higher prices -- before the winter build, without a big air-conditioner summer -- I could see that Devon (DVN - commentary - Cramer's Take) and Chesapeake (CHK - commentary - Cramer's Take) and Cabot (COG - commentary - Cramer's Take) and Southwestern (SWN - commentary - Cramer's Take) and Apache (APA - commentary - Cramer's Take) and Anadarko (APC - commentary - Cramer's Take) and XTO (XTO - commentary - Cramer's Take) -- the last's really been shelled -- will have a hard time lifting to the old levels, although they could go considerably higher.

So why own them at all if you might have to sell them after a decent move? Because longer term, isn't it obvious that we have a big gap between clean energy -- really clean, no-carbon-burn energy -- and now? That almost has to be filled with natural gas, because ethanol can't do the job. Because longer term, isn't it obvious that they will be worth a lot more as they keep finding more reserves and the reserves are being found, even at $9, at a $6 margin, even in the hard-to-get areas like the deep portions of the Gulf and the horizontally drilled portions of the Marcellus shale?

I remain committed to this group, but I can see that if AIG (AIG - commentary - Cramer's Take) and Bank of America (BAC - commentary - Cramer's Take) and Lehman (LEH - commentary - Cramer's Take) rally hard, and the worst may be over for Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take), the money is going to flow to them when that rally occurs, and the oil bears will remain on the prowl as we reached a level at which people balked -- $148 -- and that controls over everything including, natural gas. We aren't going back to that level without a war with Iran.

I do believe that if you want to play, a "long natural gas, short coal" strategy -- a modification of what Bob Marcin has articulated so successful here -- could be the way to go.

At the time of publication, Cramer was long Cabot Oil & Gas, Southwestern and Devon.

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