Following this week's theme of energy-related plays, we decided to look at natural gas and the equities that are affected by natural gas prices.
We have identified at length the strength in the energy space as a whole -- the firmness in oil prices, the strength in gasoline prices and the positive impact this has on the price of the related equities.
Along with the strength in the other components of the energy complex, natural gas prices have been rising as well. We are all aware of the need for natural gas as a heating source during the winter months and tend to think of the cold winter months as the time demand can push prices higher. Cold weather means the need for more heat, which means more natural gas consumption.
Another possible, but less-thought-of, catalyst for a move higher are the warm summer months. The push toward cleaner-burning energy sources has led to more natural-gas powered electrical plants being built as a clean alternative to coal-fired power plants. With 18% of electricity production coming from natural gas, the hot summers can actually have an equal or greater impact on the price of natural gas than the cold winter months.
The anticipation of a hot summer may be driving the price of natural gas higher here. You can see from the chart that the price moved higher into summer and then sold off hard as the lack of any supply interruptions from hurricanes drove prices down. Again, this is an easy theme for portfolio managers to buy into and one that they seem to be embracing.
The price of natural gas has been firm and inching higher, suggesting a similar move may occur this summer. The recent strength has not been dynamic, but prices are at a six-month high. Just like we saw in the price of crude oil, this price action is building a constructive technical configuration. This improvement can be seen on a shorter-term basis the past three months.
When zooming out, we see a similar improvement even on a long-term basis. This is the more intriguing issue, and the lengthy base-building process natural gas is currently undergoing is a potentially bullish occurrence. We are waiting for a break above the $8.50-8.75 level, which would complete this process.
Equities that have natural gas exposure would be a good way to benefit from this improving price situation. Just as liquidity is finding its way to most energy stocks, it is finding its way to natural gas issues.
There are only a few pure natural gas stocks in the market, but there are several we consider predominately natural gas stocks.
is one such company. This stock has recently rallied out of a multimonth base on increasing volume. The volume surge is indicative of strong demand for this issue and supportive of higher prices. We would use weakness to the $44 price level as an opportunity to accumulate SWN. We believe there is upside to the mid $50s.
At the time of publication, John Hughes had no positions in the stocks mentioned.
Hughes began his career at the NYSE in 1989 followed by twelve years running the technical analysis department and co-managing a hedge fund for a New York based brokerage firm. In 2001, John Hughes co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. Mr. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion.