Friday

Natural Gas Our Next Target | NYMEX Natural Gas Spot Price

Post a Comment April 10, 2009 – 10:25 am |   | Permalink |  Print This Post |

We are excited by our next position in Natural Gas. For new readers, here is why (Investing in Natural Gas). Regardless of how bearish everyone is on the US economy, prices do not stay at all time low indefinitely. Market makers need to make money and so you can be sure that the price of Natural Gas will recover. When Crude oil was through the roof >$140, every blog talked of nothing but the Hubert Peak Oil Theory. Even if this was true (it may be), crude oil had to swing back just so that traders could make a living. This Casino needs volatility to keep generating cash. That is our Big picture view of Natural Gas. Whether it goes to $2 (current price $3.60) or not in the short term is anyone’s guess, hence the risk in taking a position in contracts with expiry dates. Inspite of this, we are building up a case for a long position in the May 09 Natural Gas contract (which is a misnomer as it deceptively expires in 28 April 09) - here is why:

• if you look at the chart (chart pending) of the May contract, everyone who opened a short position would have made money (ie the price of the contract is close to its lowest point). Shorters are happily riding this position down as their unrealised profits grow - but as expiry draws closer, they need to close that position (ie Buy) to realise their profits. As more shorters close their positions, the price of Natural Gas would stop its descend, to the point where it starts going up as there will be more Buyers than Sellers. Question is, when will this occur? Ideally, the shorters will continue to remain greedy and ride it out to as close to expiry as possible. We will attempt to time our entry as close to expiry - but do not be surprised if it starts recovering as early as next week (we have covered for this possibility by having a long position in Natural Gas ETC, and even if we are wrong, there is no expiry allowing us to hold this long term)
• Conclusion: we will look to long Natural Gas May 2009 contract next week. Let’s hope it takes another dive down: sub $3 would be nice (but unlikely). The all time low for Natural Gas based on charts going back to 1970s (ie back in the days where it was a useless by-product in oil fields), it was about $0.80 (approximate). This does not account for inflation! The peak was $15 in about 2006 (which fits nicely with the 10:1 ratio between the relationship of Crude Oil: Natural Gas). At the time of writing, Crude is now trading at $52, which puts the ratio at 14.4 !