Commodity ETF Alert April 2014 Issue
Commodity Outlook: Natural Gas
As you may know firsthand, it was one heck of a tough winter in the Midwestern and Eastern US.
Below average temperatures enveloped large swaths of the country for the better part of January, February, and March. On one occasion, a “Polar Vortex” dropped from the Artic Circle, bringing dangerous cold along with it.
And anyone following the commodity markets knows the cold weather sent the price of natural gas through the roof…
In fact, the price of the energy commodity ran from $4 mmBtu in early January up to $6.40 in mid-February. Bulls ran the market to multi-year highs thanks to the largest EIA weekly storage withdrawals the market had ever seen.
But now that the warmth of Spring is arriving, natural gas finds itself back in the $4.50 range. With heating demand waning, it’s time for producers to push natural gas back into storage caverns. Doing so will bring inventory levels back up from abnormally low levels.
Speaking of which, take a look at this chart from the EIA…
As you can see, inventory levels (blue line) dropped well outside the 5-year average (gray-shaded area) range in recent months. Such a steep decline is a fairly rare occurrence in the natural gas market.
And here’s where it gets interesting…
Thanks to the abundant amount of natural gas consumed this winter, there’s a growing chance producers won’t be able to fill US storage caverns to appropriate levels for next winter.
And the concern will grow even more if we get a hot summer.
You see, once July arrives, investors will once again be looking to the weather maps. If temperatures rise above normal, we may see natural gas injections come in smaller than investors are anticipating- a bullish situation.
Remember, natural gas is used as a feedstock in many US power plants. If electricity demand surges due to consumers cranking up the air conditioning, gas demand will follow.
Now let’s be clear…
We likely have a few more weeks until we get any worthwhile bullish movement out of natural gas. But given the situation, it’s a good idea to get ahead of the game with this trade.
That’s why we’re entering the US Natural Gas Fund (UNG) now.
Go ahead and buy UNG at any price under $25.50 per share.
If natural gas drops to the low $4 range in coming weeks, I recommend you add to your bullish UNG position.
Let’s take a look at a chart…
Technically Speaking:
As you can see, UNG is currently trading in a defined sideways channel between $24 and $25. I expect this choppy market action to continue for a while longer as the market prepares for the summer cooling season.
But once summer arrives, we should see natural gas break higher…
And given the long-term supply/demand situation, the commodity could very well leave the $4 range for good! As always, I’ll give you more details on this trade in the monthly update in a few weeks.
WHAT TO DO NOW:
US Natural Gas Fund (UNG) is trading at $25.27
Buy UNG up to $25.50 per share
Our profit target is $28.00 or more
Category: Commodity Trading
