How to Profit from the Rebound in Natural Gas
Natural gas prices have been hitting lows and the normal price ratio to oil has broken down and hit all time highs. How can investors profit?
That’s a question that has been on mind a lot of late. Not because I’m a fervent energy investor, ‘cos I’m not, but because its seems like the easiest of investing plays out there at the moment. I’ve been reading up on the area and so was excited to today find my question asked and answered on the Motley Fool liquid lounge; “So what’s the best way to get exposure to natural gas?” The whole thread is worth a read, though unfortunately there is no easy answer unless you have a large and cheap place to store NG.
As commentators have been pointing out recently the ‘normal’ price ratio of 6-9 for natural gas to oil has broken down and the ratio hit a high of 26.35 this week.
I’ve read that the ratio is normally corrected more by a change in the price of gas than oil. That in conjunction with many other observations such as cleaner, abundant energy and reducing reliance on foreign states makes it probable that gas will trade considerably higher within the next year. Here’s a couple quotes from the LL thread.
“stay away from UNG. I wouldn’t touch UNG with a 10-foot pole given the contango issue and now the regulatory issues causing it to trade at a premium to NAV.
I’m not sure I have a good answer to your question especially if you are specifically trying to catch a rebound in the spot price. Presently, NG futures are in a contango about as steep as Mount Everest. The first couple months are down at 3ish, but then it moves up to 5 and higher across the board. So you could go long the front month contract and keep rolling it but you’ll get hit on the roll just like the ETF funds do.
UNG might actually work for a ultra-short-term trade where maybe the tracking error doesn’t hit too hard but I wouldn’t chance it. I think there are some other ETFs as well that track NG prices, but again it is the same issues and only good for maybe a few day to a few week trade.
IMO, carefully chosen stocks with substantial quality reserves, and low cost of production is still the optimal way to get longer-term NG exposure.”
“Natty gas is indeed “low”, but for good reason. Despite the plummeting rig count, energy flows have continued unabated due to a few factors but primarily high initial flows from the shale regions. This too shall pass, probably in Q4 09 or 1H 2010. Keep in mind that the natural gas prices that most of us follow are those determined at the Henry Hub in Louisiana. Since the producing region storage has been filling steadily and is far above historical averages for the month of August, gas prices have been pounded. What happens if storage tops off? How much will be paid for a product that isn’t going to be consumed and has no place to be stored? The contango in the market is clearly saying “don’t send your gas here right now”.”
Natural Gas is also a huge topic in Australia at the moment as this country gear up to become the worlds second largest exporter of gas.
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