Commodity ETF Alert April 2013 Issue

| April 9, 2013

 

THE TIDE HAS FINALLY TURNED FOR NATURAL GAS…

Long time readers are well aware of my long-term bullish outlook on natural gas…

Once the overly abundant commodity dropped below $2 mmBtu in the Spring of 2012, I started pounding the table to buy natural gas.

I had good reason to believe the commodity had finally hit bottom and was poised to trade dramatically higher.

However, I was pretty much alone in my views.

At the same time I got bullish, other analysts claimed natural gas would “drop to zero”, eventually becoming “worthless” due to acute oversupply in the market.

Funny how all those naysayers have disappeared…

As you may know, natural gas is currently testing the waters over $4 mmBtu … up 100% from the lows set last year.

Now as loyal readers know, we bought into the US 12 Month Natural Gas ETF (UNL) in May 2012 to capitalize on the current rally.

But after our trade in UNL surged to 20% gains in November 2012, something very strange happened.

Let me explain…

There’s no other way to put it, Mother Nature threw our natural gas trade for a loop last December.

As you may remember, the winter of 2012/13 started off incredibly warm. Temperatures in the Northeastern US, a key natural gas heating region, were downright balmy through year-end.

As a result, Energy Information Administration (EIA) weekly natural gas inventory report numbers were coming in well above expectations.  In other words, the lack of heating demand was keeping excess natural gas in storage… a bearish sign for prices.

Natural gas fell from $3.90 all the way down to $3.10 due to unseasonably warm temperatures.

It was at that point I moved our stop to breakeven in UNL.  I feared a continued run of above average temperatures would drop natural gas back to the $2.75 level or lower, creating a loss on our position.

At the time, EIA inventories supported my decision.  Thanks to December warmth, storage levels were still well above 2011 levels and dramatically higher than the 5-year average through early January 2013.

But as time went on, it became painfully apparent that my decision to sell UNL was incorrect…

As February rolled in, Old Man Winter arrived with a vengeance.  Temperatures cooled dramatically in key heating regions.  Blizzard after blizzard blew across the US.  And to top it all off, the Northeast and Midwest are still seeing sustained cold temperatures.

This resurgence of cold weather has finally turned the tide for the natural gas market.

Where there was once ample surplus, there are now deficits…

The most recent EIA inventory report showed 94 billion cubic feet (bcf) of natural gas was withdrawn from storage for the last week of March.  Compare that to the 42 bcf build from last year, along with the 5-year average draw of 4 bcf, and you’ll find inventories are being burned up at a rapid pace.

But even more important is the fact that US inventories now stand at 1,687 cf…
785 bcf below last year and 31 bcf under the 5-year average.

And that’s only part of the story…

Dry-gas rig counts from Baker Hughes came in at 389 last week… a 14-year low.  In other words, oil and gas companies are still passing on drilling for natural gas.  Until prices rise to where new wells are economically viable, there’s no sense in exploring.

Add all these facts up and you’ll realize bulls are now in control of the natural gas market.

With most producers unwilling to drill for dry-gas and supplies of the commodity falling below long-term averages, it’s now highly likely natural gas rises to the mid $4 range or higher in 2013.

Even Goldman Sachs is changing their tune…

In a recent note to clients, the investment bank concluded that natural gas would have to rise to $4.50 by the second half of 2013 to spur producers back into drilling.

Folks, I realize it’s frustrating to buy back into a commodity at a higher price then we sold just a few months ago, but the fundamentals have completely (and quickly) changed from bearish to bullish on natural gas.

But let me be clear about something…

As the relative warmth of Spring arrives in coming weeks, we’ll likely see a slight pullback in prices.  We’ll use this pullback as a buying opportunity.  The remainder of 2013 looks very bullish for natural gas!

ABOUT NATURAL GAS

The US 12 Month Natural Gas ETF (UNL) is without a doubt the best way to get long natural gas via ETFs.  UNL’s goal is to track the performance of natural gas using futures contracts.  Fund managers buy natural gas contracts in 12 consecutive futures months.  By averaging these monthly prices, the impact of contango is significantly lessened.

TECHNICALLY SPEAKING

UNL Chart

As you can see, we’re not exactly ‘buying the lows’ in UNL at current levels.  However, now that the bullish structural changes have occurred in the natural gas market, the downside risk is fairly limited.

Should natural gas break below $4 again, it should see a floor around $3.85.  That means we could see UNL pullback to $18.25 in coming weeks.  Remember, we’re using a pullback in UNL as a buying opportunity!

WHAT TO DO NOW

US 12 Month Natural Gas (UNL) is trading at $19.42
Buy UNL up to $19.50 per share
Our profit target is $25.00 or more

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $18.03 $17.66    +2.1%
Grains JJG $48.87 $52.44     -6.8%
Industrial Metals JJM $31.36 $32.89    -4.7%
Precious Metals JJP $82.23 $83.92    -2.0%
Softs JJS $51.26 $53.28    -3.8%
Livestock COW $26.04 $26.28    -0.9%
All Commodities DJP $39.71 $40.60    -2.2%

 

ENERGY COMMODITIES

Crude prices surged to $97 a barrel in late March when EIA numbers showed a temporary drawdown in US crude inventories.  However, when the exceptionally weak March US jobs hit the wires last week, crude bulls ran for cover.

As you know, we’ve been waiting for a trade in crude for months now.

But with the commodity stuck in the $90-$97 a barrel range, there’s not much room for profit.

We really need WTI to drop into the mid- to lower-$80 a barrel range before we can enter the commodity on the long side.  Just be patient, at some point we will get our chance for crude market profits.

See this month’s trade alert for detailed information on the natural gas market…

GRAIN COMMODITIES

If you had any doubt about the risk of being long the corn market this spring, look no further than recent trading action in this essential commodity.  Over the course of two trading days, corn futures dropped $1 a bushel… an enormously bearish move.

What happened?

The USDA announced US farmers are planting the biggest corn crops since the 1930s … 97.28 million acres.  If Mother Nature cooperates this growing season, the US should have ample corn supplies come Fall.

Stay on the sidelines in grains for now…

INDUSTRIAL METALS

Another rough few weeks for industrial metals…

Copper dropped to $3.32 a pound in last week’s trading as investors realized there are adequate supplies of the red metal for global demand.  Aluminum and zinc also dropped as investors questioned the status of China’s 2013 growth outlook.

We many see a rebound in industrial metals in the near term.  However, the longer-term bullish potential for industrial metals looks subdued.  Steer clear of industrial metals for the foreseeable future.

PRECIOUS METALS

Precious metals continued their downward slide in recent trading.  Gold dropped to $1,550 an ounce last week while silver sank to $27.  For metals’ bulls, the price drop alone is troubling.

But even more worrisome is the fact that the drop came in the face of a shockingly weak Q4 GDP number released in late March.  In recent years, gold and silver rose sharply on weak GDP results as it meant the Fed was likely to stimulate the economy further through QE.

But that doesn’t seem to be the case anymore…

Even though it appears the Fed will continue QE3 through the end of 2013 and beyond, gold and silver still aren’t reacting all that favorably.

Gold and silver did get a nice boost on Friday thanks to the much weaker than expected US jobs report.  However, it’s likely that precious metals prices will stay volatile and range bound for some time to come.

Or position in the ETFS Physical Palladium Shares (PALL) took a hit last week as investors sold palladium.

Even though the supply/demand fundamentals remain very bullish, we’re entering a seasonally weak period for palladium.  As a result, we could see the price drop to $700 an ounce in the near future.

However, don’t let this scare you out of our PALL trade.  There’s plenty of upside potential for palladium in the latter half of the year.

I’m leaving PALL at a hold for now.  We may get a great opportunity to buy in at lower prices soon.

SOFTS

Just in case you’re having doubts about our trade in iPath Pure Beta Cocoa (CHOC), a March 26th Reuters article does a great job of clarifying why we’re long cocoa.

The article correctly states that cocoa demand is expected to exceed production by 45,000 tonnes in 2013… the core reason behind our long position.

What’s more, the article goes onto say that global bean output will need to rise by 1 million tonnes in coming years in order to meet the world’s growing appetite for cocoa.

Folks, be patient with CHOC… cocoa prices are highly likely to start rising soon.

As far as sugar goes…

The failed breakout we talked about in the last update drove sugar down to 17.5 cents per pound last week.  No doubt about it, sugar needs to stabilize at these levels and start making its way higher.

I’m still betting sugar bears will give up on the their short position soon.  Such a scenario will send sugar prices higher in a hurry.  For now, keep your position in iPath DJ-UBS Sugar (SGG) at a hold.

LIVESTOCK

Thanks to the massive selloff in corn in recent weeks, feeder cattle prices are up strongly.  In fact, feeder cattle rose from $1.35 a pound in mid-March up to $1.42 as of yesterday.

Remember, the correlation between feeder cattle and corn is fairly strong.  When corn falls, feeder cattle generally rise due to feedlot operator’s willingness to buy additional cattle in the face of decreasing input costs (corn).

Portfolio Changes

  • This month we’re adding natural gas (UNL) to the portfolio.

 

Category: Commodity Trading

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