Everything's become a technical trade nowadays. Natural gas is no different; in fact, it has been trading entirely technically recently. I think that will continue to be the theme going forward, so I remain entirely bullish on natural gas here despite an incredible case for the contrary.
You couldn't find a more bearish case for natural gas prices if you tried. And I have been an advocate of the position that, at least compared with crude oil, natural gas has been a lot closer to following the fundamentals.
And the fundamentals are all bearish when looking at natural gas prices.
The global recession has destroyed demand.
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New technologies have boosted supply of natural gas to historic levels, and new pressure technologies have made old finds new again -- as with Marcellus shale fields in New York and Pennsylvania.
Why I'm a Natural Gas Bull
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Recent finds in Florida and the Gulf of Mexico when developed will add even more supply possibilities to a domestic market already drowning in natural gas.
You should expect natural gas, then, with such overwhelming supply and demand negatives, to continue to sell off -- but instead, we've seen a very nice rally in natural gas prices and the curve of prices indicates that the market will be headed higher in the future. I'm on board with that idea. I don't think natural gas, despite the bearish scenario, is done rallying and therefore neither are natural gas stocks.
How can I say this? Natural gas in U.S. storage for the week ended Sept. 18 stood at 3.525 trillion cubic feet, very close to the all-time record for nat gas storage of 3.565 trillion cubic feet, set in October 2007. That's 17% over the storage numbers we saw last year at this time.
Natural gas does not lend itself to storage as simply as crude oil. Crude oil is a steady state commodity and can be stored in a Dixie cup, if need be. When crude prices were so depressed at the start of the year and the premium for future crude so outsized, we saw many strange storage solutions for crude oil, including the cannibalization of tankers. But you cannot use tankers to store natural gas.
Gas is stored mostly in empty wells and salt mines, and the total limit on storage is being reached.
When that limit is reached, gas producers have little choice. You cannot "turn off" wells that are producing, and you will inevitably begin to see "flaring" of wells. This is when producers are forced to light and burn gas right at the wellhead because there is literally no place to put it.
This is a sad sight in a country that proclaims its desire for energy independence, as well as making an environmental problem in addition. But that is what we are looking at.
Still I remain a bull, and I am still recommending my core five natural gas stocks:
The simple reason for this is that the fundamental story doesn't tell the whole tale. Natural gas is still a great technical trade (the only kind that seems to matter these days) and still historically cheap.
Technically, nat gas is still recovering from such ridiculously low levels, trading at less than $2.50 last month. That equates to a comparative crude price of around $22. Even now, with November gas trading at $4.70, that equates to a relative crude price of $42 a barrel. Not free, but relatively still very cheap.
And I need not be a great forecaster to see nat gas rising over the next several months. December natural gas is already trading 17% higher than spot nat gas, and gas for delivery in January 2010 is trading 22.5% higher.
Historically, one chart will serve to convince you just how cheap nat gas still is.
No genius analysis is required after looking at this chart. Either this country will stop using natural gas, or it will accommodate this historic disconnect in prices and start to increase demand of this clean, domestic and cheap energy source.
That's why every down move in nat gas prices and stocks is an opportunity, despite the horrible fundamentals right now. It's easy to be fooled by the simple story of depressed demand and historic supply. That's the short-term story. But if we want to take advantage of disconnects like this, we need to look deeper.
At the time of publication, Dicker was long Chesapeake, but positions can change at any time.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.