CEA Portfolio Update – May 2015
Multiple Catalysts To Send Natural Gas Higher In 2015…
As you know, I sent out an email on May 1st, alerting you to the buying opportunity in the US Natural Gas Fund $UNG.
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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Things are looking up for natural gas…
After sinking to 3-year lows at $2.50 mmbtu in late April, the commodity rallied to multi-month highs at $3.10 just a few short days ago.
The recent upturn sent our position in the US Natural Gas Fund (UNG) up to $15.28 on May 19th– a 14% upturn.
Not bad for a few weeks work!
But here’s the deal…
May’s rally is a far cry from what I believe this commodity is capable of over the next year.
In fact, there’s a distinct possibility natural gas surges back to the $4 area by the end of 2015 due to the catalysts I’m laying out below.
What could send this commodity sharply higher?
Let’s start with this…
For the first time ever, liquefied natural gas (LNG) will be exported from within the contiguous US. That’s right, the first shipment of super cooled natural gas will be loaded on a specially designed tanker ship, destined for an overseas market.
Who’s making this historic move?
Cheniere Energy $LNG is on schedule to make its first LNG shipment from its Sabine Pass, Louisiana export terminal later this year. All told, the company expects to liquefy 1 billion cubic feet per day (bcf/d) of natural gas from its first two operational liquefaction trains.
And once the second stage of the project is operational, Chienere expects 2 billion bcf/d of LNG to pass through its facility.
But that’s just the start of it…
In coming years, Sempra Energy $SRE, Dominion Resources $D, and ConocoPhillips $COP will also be exporting natural gas from facilities within the contiguous US.
So far, the four companies above are the only ones to have completed the full approval process with the US Department of Energy and the Federal Energy Regulatory Commission.
However, there are fifteen proposed LNG export projects that will likely be approved in the near future.
Without question, this new source of US demand has the potential to really boost the price of natural gas.
In fact, energy experts estimate global LNG demand will more than double from 30 bcf/d to 65 bcf/d in coming years!
Now let’s be clear…
The export catalyst I just laid out is long-term in nature. It will likely take quite some time before LNG exports make a big enough demand impact to really affect the price of natural gas on its own.
But when you factor in the looming start of the summer cooling season, things get more interesting…
Over the past few weeks, natural gas bulls took the market higher due to warm temperatures in key usage regions. As a matter of fact, for the week of May 15, natural gas in storage rose by 92 bcf.
That’s far less than the 99 bcf inventory injection expected by analysts.
This warming trend is expected to continue for at least the next two weeks. According to the National Oceanic and Atmospheric Administration (NOAA), warmer than average temperatures are ready to consume most of the nation.
See for yourself…
As you can see, large swaths of the US will be subject to above average temperatures in coming weeks. Should this trend continue into the heart of summer cooling season in July, it will greatly increase the odds of higher natural gas prices in coming months.
Here’s the bottom line…
With natural gas trading near multi-year lows, it is simply too cheap and has too many bullish catalysts to ignore.
Not only will LNG exports increase demand, but more consumers are expected to take advantage of the relatively cheap fuel. For example, US utilities are building new gas-fired power plants to replace dirty coal-fired plants that are slowly being phased out.
What’s more, chemical companies are expanding plants that convert natural gas into essential products we use every day. You know, things like plastics and fertilizer.
Now, despite all these bullish factors, let’s be perfectly clear on something…
This will be a patience trade. I’m quite certain it will take a considerable amount of time for natural gas to really find a long-term bottom. Don’t be surprised if the commodity retests the recent lows at $2.50 mmbtu in the near future.
As long as UNG doesn’t drop below our risk control price of $12.13, I suggest you be patient and keep holding your position for higher prices!
Commodity Review
| Commodity | Ticker | Current Value | Last Month | Change |
| Energy | JJE | $10.76 | $10.26 | +4.9% |
| Grains | JJG | $33.53 | $33.62 | -0.3% |
| Industrial Metals | JJM | $25.88 | $26.60 | -2.7% |
| Precious Metals | JJP | $57.63 | $56.94 | +1.2% |
| Softs | JJS | $33.00 | $35.33 | -6.6% |
| Livestock | COW | $28.21 | $27.28 | +3.4% |
| ALL COMMODITIES | DJP | $29.14 | $28.91 | +0.8% |
| As of 05/22/15 |
Energy Commodities
Well folks, West Texas Intermediate (WTI) crude peaked at $62.58 a barrel on May 6th. Since then, the commodity has traded in a rather lackluster range around $60.
What’s the next big move for oil?
There are plenty of bearish analysts out there suggesting crude will collapse back down to the mid-$40 range, and possibly lower.
I disagree…
The more likely scenario has crude rising to the high $60 range by the end of July.
In a worst-case, oil may drop to $55 area in coming weeks before rallying into the high demand summer driving season.
What do we do with our position in the Energy Select Sector SPDR $XLE?
With $XLE once again trading under our maximum buy price of $80.25, you can buy the ETF if you haven’t already. With WTI crude likely to rise further in coming months, there’s a very good chance $XLE rallies to the $85 area or higher.
Grain Commodities
Ever since the US Department of Agriculture’s (USDA) prospective plantings report in late March, corn, soybeans, and wheat have been under bearish pressure. Thanks to abundant inventories and what’s shaping up to be another hefty harvest this year, grains are best avoided on the long side.
The only catalyst we have for sharply higher prices in coming months is some sort of weather disruption…
Maybe we get another round of record-breaking heat like we saw in the summer of 2010. As you may remember, corn exploded from $3.75 a bushel all the way up to $8 thanks to massive drought-induced crop failures.
Stay on the sidelines in grains for now, but be ready for a long position at a moment’s notice!
Industrial Metals
After jumping to $2.95 a pound in early May, copper is back on the defensive. The red metal sank to $2.80 late last week and looks to extend its weakness in coming sessions.
What has copper, and other industrial metals, sinking lower?
Despite the People’s Bank of China ramping up stimulus in recent weeks, there’s still considerable worry about the strength of the Chinese economy.
Case in point, China’s flash manufacturing PMI just came in at 49.1 for May. While it was a slight improvement over April, the sub-50 reading still shows the country’s manufacturing sector is contracting.
Until we see economic data supporting the idea China can return to growth in the mid-7% to 8% range, it’s best we steer clear of industrial metals.
Precious Metals
Gold rallied over the $1,220 an ounce earlier this month. For a short time, it looked as though the yellow metal had a chance at breaking out to even higher prices.
But the excitement was short-lived…
Gold, along with silver, platinum, and palladium, fell back into their multi-month trading ranges early last week.
What’s the next major move for these metals?
Given the fact precious metals were unable to collect any meaningful gains as the US Dollar sold off in late April and early May, there’s a growing likelihood of another steep downturn.
It’s not out of the realm of possibility to see gold trading at $1,150 again in coming months. Silver could easily see the $15.50 area or lower.
The only saving grace gold and silver have is a potential “accident” involving Greece. As you’re likely aware, the country is in heated talks with the International Monetary Fund (IMF) and other creditors.
If a deal isn’t reached soon, Greece may default on its debts. You can expect some fireworks in the global financial system should this worrisome event come to fruition.
Softs
Despite the bullish fundamentals, coffee just couldn’t break to higher ground in recent trading. The commodity made a couple valiant bullish efforts, but ultimately fell to $1.30 a pound in recent trading.
The recent downturn stopped us out of our position in the iPath Bloomberg Coffee Total Return ETN (JO). As you know, our risk control price was set at $22.40, which was first hit on May 6th.
If you haven’t already, go ahead and close your position in JO.
If the coffee market isn’t going to respond to the burgeoning bullish global supply/demand situation, it’s likely we see another downturn to multi-year lows near $1.00 a pound.
We’ll take another close look at coffee if it reaches that oversold level!
Livestock
Believe it or not, feeder cattle are on the verge of breaking to new all-time highs. The commodity is trading at $2.19 a pound as I write, which is within a stone’s throw of the record highs set in October 2014.
This upturn should come as no surprise…
I’ve stated many times in the past the cattle market would remain strong for the foreseeable future. There’s simply not enough supply in the US relative to demand.
Unfortunately, this is one bullish commodity trend we’ll have to watch from the sidelines. There isn’t a cattle focused ETF available with sufficient liquidity to trade safely.
Category: Commodity Trading
