Is There Still Opportunity in the Natural Gas Space?
Look at a long-term chart of natural gas, and youíd have made quite a score over the last year, just by being long. Since a spot price low of under $2/mcf in the spring of 2012, we saw futures top $5.50/mcf briefly yesterday before February futures expired. Even my most hated ETF the United States natural gas fund (UNG) rallied from $18 to over $26 since early December.
Much of this recent rally has obviously been due to extreme cold reaching far into the southland of the US. The market itself is expressing the short-term nature of this phenomenon as well: While March is trading today at $5.10/mcf, futures for May are trading at $4.35/mcf and are under $4 as soon as the spring of 2015. This deep level of backwardation in the curve of prices is a classic indication of short-term conditions impacting front month futures while not greatly impacting longer-term price expectations.
But hereís the thing, and a most important thing it is: futures curves of prices of most commodities are notoriously bad predictors of future price action. Have a look at the recent activity of natural gas itself if you want proof. After an initial run over $4/mcf at the start of January, developing an already very deep $0.30 premium, temperatures in the Northeast moderated and gave natural gas the strong opportunity to back off again towards and under $4/mcf Ė but it didnít. I viewed this action as exceedingly bullish (but did not recommend or act on it) and, sure enough, presaged another massive run to a high in the February futures of $5.72 before expiring yesterday. Indeed, that discount to the March futures sunk a lot of the traders who were depending on the short-term nature of the move as March futures drove higher also settling at $5.52 yesterday.
I will not be fooled again. Temps are scheduled to again moderate starting this weekend, weíll see no more ice in Atlanta soon and natural gas is already off more than $0.35/mcf today. All things being equal, and if the futures curve is correct in itís futures pricing, that deep backwardation should moderate and/or spot prices should come down well below $5/mcf.
But if that doesnít happen, Iíll be a hair-trigger ready to buy Nat gas futures out on the curve where the prices still hover around $4.35/mcf and below. There are fundamentals to believe that $5/mcf gas prices will be sustainable: LNG exports are going to start to really roll with the completion of the Dominion (D) plant in 2014, there is continuing sequestration and dropping stockpiles and the Presidentís latest talk of natural gas in the State of the Union address.
And what of the natural gas stocks? Most have shown limited upside to this weather-induced move: Ultra (UPL) moved from $21 to $24, Chesapeake (CHK) looks in a rut at $27; Devon (DVN) has traded horribly. If $5 gas is coming back for real and for good, thatís about to change for these stocks and others.
I give you again a natural gas stock that I think has value and upside if you want to play a long-term natural gas opportunity and are wary of the futures themselves -- Southwestern (SWN). See my other columns for my rationale on that one, but at $42, I like it Ė for the long haul.
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June 17th, 2019
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