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Is Natural Gas Potentially Bottoming?

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March 23, 2009 – Comments (26) | RELATED TICKERS: UNG

I am taking a look at the technical picture for Natural Gas. I have no real life positions in Natgas in my short term account and as of right now I am only looking at trending information. So just a weekly chart below (I like looking at weekly charts for trending purposes, and if I am interested in getting in or out of a position I like to examine the daily charts).

Enlarge

What interests me about this chart:

The RSI and Stochastics both read oversold (but not as extreme as oil was when it hit $35/bbl), the MACD just sported a positive cross and has a bottoming pattern to it. But the thing that is most interesting is the large spike in price last week, and the fact that the price bounced off the same bottom as the previous weeks price.

So I wanted to see if there is some historical support here. And there is. I looked back at a 10 year chart and Natural Gas spent most of 2002 at or below 4.00 $/MMBtu and spent most of 2003 at or above 4.00 $/MMBtu (Resistance turned into Support). This area between $3.75 and $4.25 looks like it is a major support.

Given all of that, I believe Natural Gas is in a bottoming stance.

If you look back at my Caps picks, I picked Natural Gas to bottom (via UNG) at the end of December (I did not put any money in real life). I was faked out by that small plateau made in December. However the price seems to be converging again, but this time off of some major historical support.

I am not buying in real life yet, but I am definitely watching.

--- Now for a little Fundamental Analysis (or lack thereof).---

I am not as familiar with the Natural Gas industry as I am with the Crude Oil industry. I am not familiar enough with the demand/supply situation to know if there are statistics that complement this technical picture. I have not looked at the supply stats for Henry Hub, nor have I been watching open interest for Natgas.

If anyone who is in the know and has been following the Natural Gas Industry, I would love some input! I would be very interested in someone adding some industry insight to this technical discussion. Thanks!

As always I would love to hear your comments!

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

26 Comments – Post Your Own

#1) On March 23, 2009 at 10:35 AM, falang1 (96.13) wrote:

I would agree.  Although I got faked out as well in Dec-Jan.  I have it in real life as well through UNG.  A ittle more than I would like due to a screen refresh error (seriously, oops).  I don't think it's going to shoot up and post some huge profits but it's part of a nice commodity base.  My CAPS score on it sucks though. Note I am not an expert on NG, only agree with your stance.

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#2) On March 23, 2009 at 3:29 PM, binve (< 20) wrote:

falang1, Thanks. Yeah, I have been watching it move down and base. Fake out up and then move down over and over again. I am more content to trade the confirmed uptrend in oil and simply watch Natgas for awhile :)

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#3) On March 24, 2009 at 4:35 PM, Tastylunch (29.21) wrote:

Yeah actually I was thinking the same thing Binv. Stop reading my mind! 

Still like you I think it's best to wait for confirmation. It's like buying Oil at 32, it looks awesome now, but at the time it could have gone either way. Buying Oil at 41 was the safer way to go.

However I will say this, the oversupply issue is far worse  in natural gas than in Oil based off my read. And I don't believe the price/demand  seasonality favors nat gas now anyway like it does oil.

My guess is that it will base over the next four months with an Obama bounce up here and there.

This is one to watch for the fall I think, we'll see.It's going to take some time to work off that oversupply.

 The other thing is Oil looks overbought now and the BDI is still just horrendous, I'm expecting consolidation in Copper and Oil right now. Let's be honest the prices are moving in anticipation of  furture shortage but we are still long way away from actually seeing that materialize fundamentally in Oil.

The other thing is once again China is stockpiling a commodity (this time it's copper) so we may we see a sharp pullback when they stop.

So yeah Natural Gas I don't quite think it's time yet.

Hopefully Dexion or VTEengineer comes by, both of them have  pretty decent knowledge of Natural gas industry to my recollection. 

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#4) On March 24, 2009 at 4:59 PM, binve (< 20) wrote:

Tasty: Hey binv, I'm thinking of a word that's not Natural Gas. Try and guess.
Binv: Is it Natural Gas?
Tasty: AHHH. Get out of my head. Get out of my head!

.... I don't know if you watch Family Guy at all, but I think that was an appropriately bastardized quote based on your first sentence :)

Thanks for the input man. Yeah, that jives with my gut feeling, but I really don't have any data to back that up with.

Yeah, I agree oil is overbought on the daily chart and the pullback that I was discussing in my last Oil post as of today looks like it is underway. I am going to time my next oil purchase after I see what the pullback looks like.

I am mostly watching everything right now. The only things I feel convinced about is Oils general uptrend. Equities are squirrely. And I want to see more evidence of an established bottom in Natural Gas.

Thanks man.

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#5) On March 24, 2009 at 5:02 PM, buildgreen (< 20) wrote:

how do you know what china is stockpiling?

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#6) On March 24, 2009 at 11:28 PM, Tastylunch (29.21) wrote:

buildgreen

I got it from the news

http://www.fundmymutualfund.com/2009/03/ftcom-chinese-stockpiling-spurs-copper.html

I' constantly on the search for a more direct source. Although it's pretty obvious what the Chinese Strategic Reserve is doing they are picking one commodity at a time and secretly buying large quantities. First it was oil then steel, now copper. My guess is they want to keep commodity prices cheap by spreading out their buys over different sectors while gaining control of the supply.

binve

good story from the same blog on natural Gas trends

http://www.fundmymutualfund.com/2009/03/will-more-liquified-natural-gas-turn.html Report this comment
#7) On March 25, 2009 at 9:06 AM, binve (< 20) wrote:

Tasty, thanks for the link man, that was very interesting reading! Yep, watch mode (not buy mode) it is :)

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#8) On March 25, 2009 at 9:21 AM, madcowmonkey (< 20) wrote:

Beans! Beans! The more you eat.........

Swinging doors in the dome....hey binve? Don't get into madcow's head....you would laugh too hard.

Oil goes up and natural gas will follow shortly after. Call it a trend if you will.

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#9) On March 25, 2009 at 9:48 AM, binve (< 20) wrote:

Ahh, so your position is that "Natural Gas" is the by-product of the digestion of "magical fruit".... :). Hmmm, maybe we could remarket it as "Magical Gas"....! Yes, that's it!

Dude, I bet madcow's head is right up my alley: lots of poop jokes and people getting hit in the face with dodgeballs. I bet I would be laughing all of the time.

Yeah, I have seen that trend before. But it seems like the supply and demand situation is a lot different for NatGas. Interesting.

Thanks man!

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#10) On March 25, 2009 at 11:08 AM, madcowmonkey (< 20) wrote:

I do enjoy a good dodgeball game.......with wrenches!

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#11) On March 26, 2009 at 1:29 PM, REITDUDE (91.00) wrote:

Hi Binve.  I agree on the general outlook for equities & oil.  I'm mostly cash, but do own a bit of PBR & DXO.  What are your favorite RL oil picks?

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#12) On March 26, 2009 at 2:06 PM, binve (< 20) wrote:

REITDUDE, My fav real-life oil picks for the short-term (weeks/couple of months) are: USO, USL, DXO, and UCO. Right now I am very bullish on the commodity and I am neutral/bearish on the producers. I don't know if you have checked my the last 4 posts I did on oil, but several of us have been having discussions on oil supply and how profitable oil companies are with oil in the: $35-50 range, $50-75 range, >$75 range.

My "forecasts" (basically numbers I am pulling from my... uhhh, how about, from the air :) ):

Short term (next couple of days to 2 weeks): Oil is overbought in daily terms. It is hitting a resistance zone between $50-55/bbl. I expect a pullback and the most likely test point will be the 50 day-MA

Intermediate term (2 weeks - 3 months): Oil on a weekly chart looks very strong, made a solid bottom, and is now in a new uptrend. 38% retracement from top (147) to bottom (35) is likely. Which means my target is $77 oil.

Mid term (3 months - 2 years): ??? Who knows. Your guess is as good 

Long term (>2 years): Oil will be at much higher levels. Maybe 100/bbl, maybe higher. I think the inflation cat is way out of the bag. Oil (and all commodites) will trade much higher. Gold especially.

I think oil has a good shot of getting back up to $75 in the next few months. But will it stay up there for this year? Man, I don't know. The state of the economy says no, inflationary pressures say maybe.

So this is why I am very bullish on oil as a commodity (since it is an inflation hedge) and much less so than the producers. Many of the rig operators are not making money with oil this low. And while I see oil going to $75 in the next few months, they supply/demand situation is too cloudy now to say whether it will stay there this year.

From a long term standpoint I am bullish on COP and STO, not only because they are (reasonably) efficient producers but also because they are (partial) green plays (good green investment). BP is sort of in the same boat, (reasonably efficient, partial green). But rig operators, drillers and oil-sands projects I am not bullish on right now. I think several will go bankrupt in the next few years (all will probably drop in value). And when inflation starts to become front page news, I think a lot of the survivors will be priced very reasonably.

Thanks for the comments and the questions!

 

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#13) On March 31, 2009 at 5:31 PM, herztical (27.89) wrote:

bvine

 Great blog...I started to chew on some nat gas plays for a longer term investment (after looking for a while).  nat gas is an overall comod play specifically I like RIG, APC.  Also like BP from integrated oil side mostly bc of dividend (safe as long as oil is 50-60 as net cash positive). Hell even if it gets cut 50% a 4%+ yield isn't too bad.

http://online.wsj.com/article/SB123367180069443503.html?mod=todays_europe_money_and_investing

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#14) On March 31, 2009 at 9:14 PM, binve (< 20) wrote:

herztical,

Thanks I appreciate that. Supply and Demand for Natural Gas is a lot more localized and variable than it is for Oil. I like it a lot, but right now I am just keeping it on my radar. I am not willing to actually put my money down until I see some good basing for a few weeks and then an uptrend. When I do it will probably be in UNG. I agree that as long as $3.75 holds for Natural Gas and Oil averages >$50 for the rest of 2009, BP should have a safe dividend. 

However, as purer plays on Oil and/or Natural Gas as a commodity and with better dividend, I think a few of the CANROYs are in better position.

Thanks!

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#15) On April 06, 2009 at 1:55 AM, Tutom (< 20) wrote:

Nat Gas is oversold and can quickly bounce back to $5. Lots of gas in N.A. but most of it is tight gas (unconventional). It costs big money to drill and complete those deep horizontal wells and it won't be spent if companies don't see $10 gas in the future. And, they've got to keep drilling them because Nat Gas wells don't keep producing for 80 years like some oil wells. In an area of Alberta where I have some mineral interests, companies are pulling out. Oilfield services costs are still high. They tell me they need $10 gas. 

We're going to see more M&A activity, so looking for bite size candidates might be lucrative. Most Canadian energy corps are bite size for the big guys. You got to love EnCana (ECA) and Talisman (TLM). I also like Galleon Energy (TSE:GO), Crescent Point Energy (CPG.UN), and Arc Energy Trust (AET.UN). I own Harvest Energy Trust (HTE). in the US, I have CHK and SWN.

Anybody else long the $CAD? This seems like the ideal way to do it--CANROY's! Remember, Canadian energy stocks got beaten down more than their US counterparts. The Canadian dollar also lost 20% of its value in relation to the $US. How many Canadian banks have gone bust? (ZERO...)

I moved all my cash into $US dollar when the $CAD was at par. Time to repatriate. Started on Friday. 

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#16) On April 06, 2009 at 4:02 AM, maxhoffa (< 20) wrote:

i also like TLM. 

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#17) On April 06, 2009 at 4:17 AM, maxhoffa (< 20) wrote:

what are the tax consequences for u.s. citizens owning canroys? 

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#18) On April 06, 2009 at 5:37 AM, maxhoffa (< 20) wrote:

not good it would seem  . . .

 

http://seekingalpha.com/article/107494-canadian-royalty-trusts-will-never-return-to-their-former-glory 

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#19) On April 06, 2009 at 1:00 PM, binve (< 20) wrote:

Tutom,

Thanks for the comments man! Yeah, I am very interested in Nat Gas, and I am glad to have comments from people like you who know more about the fundamentals than I do. I am good on oil's fundamentals, but Nat Gas, not so much :)

I have held HTE in the past, but they have cut their divdend so much. It is obvious that they were not as well-hedged as some of the other CANROYS. Sometimes hedging is bad, but sometimes it is good :). But while the other CANROYS have held up better through the downturn, I think HTE, since it has been decimated, is a particulary interesting value play. Low stock price, unhedged, and Nat Gas heading higher? Sounds like a win-win-win to me :)

Thanks man!

maxhoffa  .

I have most of my CANROYS in my IRA for these exact reasons.

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#20) On April 06, 2009 at 4:48 PM, GVdrone (< 20) wrote:

binve, I have been looking at CANROYs as well, but I feel as if I should mention that HTE is moreso a crude oil play, nevermind if you already knew

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#21) On April 06, 2009 at 4:52 PM, GVdrone (< 20) wrote:

oddly, CANROYs have way more N.gas players than crude oil

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#22) On April 06, 2009 at 7:41 PM, binve (< 20) wrote:

GVdrone, Yeah HTE has about 70% crude exposure and 30% Nat Gas exposure. The point of my comment is that Crude has been trending up and Natural Gas has been trying to find a bottom

Both if both crude and Natural Gas trend up, and HTE is unhedged (which I believe to a large degree they are), then that should be good things for their share price and their dividend.

Thanks man!

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#23) On April 06, 2009 at 11:32 PM, GVdrone (< 20) wrote:

I guess our only fear is that HTE may go the way of AAV, cut their divs completely&turn into a cooperation.

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#24) On April 07, 2009 at 10:16 AM, Tutom (< 20) wrote:

Yes binve, I picked up HTE as a value play. Not one of my favorite companies, but if you think oil and gas are going up, there could be some nice up side. Bought in the 4's. Turning into a corporation may not be so bad, GVdrone. They would probably not pay any taxes for two years or so after becoming a corporation. I might be wrong, but I think it would make a better purchase as a corporation. 

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#25) On April 07, 2009 at 12:47 PM, Tutom (< 20) wrote:

BTW, although I like Nat Gas and think it is cheap, it could still get cheaper. I'm not buying until I see a bottom. Why buy on the left side of the cup? I agree with you that oil is better technically. I'm looking at August for Nat Gas.

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#26) On July 30, 2009 at 1:08 AM, dexion10 (27.49) wrote:

sorry for the delayed response. I am neutral on nat gas here but bearish on nat gas stocks because slow depletion nat gas cos are already discounting $7-$8 natural gas - which is a price band we  probably can't maintain for any 5 year period without some real good inflation

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