Commodity ETF Alert May 2012 Issue
I know I may sound a bit brash by saying this, but this month’s trade will likely be one of our most profitable ever.
And that’s saying something…
After all, we’ve had some big gains in the Commodity ETF Alert over the past few years.
For example, in April 2009 we made a trade in copper that eventually netted us a stunning 56% profit. And later that same year, we made a remarkable 49% in nickel, and another 48% gain in silver.
Of course, long-time readers know we’ve had plenty of profitable trades since the CEA came into being in 2009.
But the trade we’re about to initiate this month should easily eclipse the profitability of any trade thus far.
How can I make such a statement?
There’s a once in a lifetime opportunity in the world of energy right now. But it has nothing to do with ‘old’ energy sources like oil and coal.
Instead, it has to do with the next generation of hydrocarbon fuels – natural gas.
As you may know, natural gas is trading at incredibly inexpensive levels right now. In fact, Henry Hub natural gas can currently be had for $2.35 mmBtu. That’s unbelievably cheap.
Not since 2002 have gas prices been so depressed. Take a look…
As you can see, the prevailing trend for natural gas over the past four years has clearly been down. Prices bounced a bit in 2009, but since then natural gas has slowly descended into the low single-digit abyss.
What’s causing the price collapse?
Supply… lots of it.
Technological drilling advancements in recent years have allowed exploration and production (E&P) companies to unlock vast quantities of gas. So much so, that the US is expected to run out of places to store it later this year.
Due to an exceptionally warm winter, natural gas demand was abnormally weak over the past six months. As a result, gas inventories are well above average for this time of year. And to make problems worse, the coming summer months are prime time for injecting additional gas into storage.
Due to this storage issue, many doom and gloom analysts are saying natural gas could fall to $1.00 or lower later this summer.
But I disagree…
At today’s price of $2.35, natural gas is much closer to a long-term bottom than most analysts think. Now let me be clear, I understand the storage issues facing the natural gas market. But I just don’t see gas falling another 50% from current levels.
Why?
First of all, the collapse in natural gas prices is bringing massive change to the US energy landscape.
Utilities are switching away from coal to natural gas fired plants. Trucking companies are switching away from diesel to natural gas powered engines. And if that weren’t enough, the Federal Energy Regulatory Committee (FERC) just approved the first US liquefied natural gas export facility in nearly 50 years. Foreign countries are drooling at the prospect of getting their hands on cheap US natural gas.
All these developments point to soaring natural gas demand in coming years.
But growing demand is only half the story…
Natural gas E&P companies are currently in the process of shutting-in dry gas production. In other words, uneconomic wells are simply being capped until gas prices rise to more profitable levels.
And therein lies the key to the bullish case for natural gas…
Down-on-their-luck natural gas E&P companies are focusing future drilling efforts on oil and natural gas liquids production (NGL). These higher margin products are much more profitable than natural gas.
Once companies make the switch, they won’t turn back to natural gas drilling until prices are much, much higher.
The dwindling supply effects of the ongoing production shut-ins will eventually creep into weekly Energy Information Administration (EIA) natural gas inventory numbers.
And once it does, it will be game on for natural gas bulls…
Now, I won’t go as far as to say $2.00 is the absolute bottom for natural gas. Prices could slide below this important level as the summer injection season kicks into high gear.
But the fact is, we need to start establishing a position in natural gas now… not later. The combination of increasing demand and production shut-ins could send gas prices higher sooner than even I’m suspecting.
And the bottom line is, we can’t afford to miss an opportunity to buy natural gas at decade low prices.
Like I said earlier, the profit potential of this trade is enormous. All natural gas has to do is return to normalized levels at $4 to $6 mmBtu and we’ll make absolutely enormous gains.
How are we going to do it?
Let’s find out…
ABOUT NATURAL GAS
Once again, we’re using the United States 12 month Natural Gas ETF (UNL) to get long the gas market. UNL’s goal is to track the performance of natural gas using futures contracts. Managers of the fund buy contracts in 12 consecutive futures months. By averaging these monthly prices, the impact of contango is significantly lessened.
TECHNICALLY SPEAKING
As you can see, UNL has followed natural gas prices lower over the past year. But more importantly, notice how prices are starting to perk up in recent weeks. This is a clear sign the momentum is starting to shift in favor of the bulls.
The $2.00 area on natural gas futures roughly equates to $15.00 on UNL. Like I said earlier, natural gas may decline a bit further in coming months. And that means we’ll likely see UNL return to the $15.00 level in coming months.
If it does, use it as a buying opportunity.
This trade is going to require extreme patience. In order to realize the full potential of rising gas prices, we’ll need to stay invested for quite some time.
WHAT TO DO NOW:
United States 12 month Natural Gas (UNL) is trading at $16.66.
Buy UNL up to $17.30 per share.
Our profit target is $35.00 or more.
Don’t forget your position sizing.
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $17.18 | $17.81 | -3.5% |
| Grains | JJG | $46.67 | $47.50 | -1.7% |
| Industrial Metals | JJM | $35.82 | $36.33 | -1.4% |
| Precious Metals | JJP | $88.43 | $89.87 | -1.6% |
| Softs | JJS | $61.62 | $66.70 | -7.6% |
| Livestock | COW | $27.26 | $28.41 | -4.0% |
| All Commodities | DJP | $40.83 | $41.96 | -2.7% |
ENERGY COMMODITIES
Our exit out of the oil market was nearly perfect…
As you know, we closed the second half of our USL position for a gain of 22% in the last update. On the day we closed this trade, crude could be had for $104 a barrel. Just ten short trading days later, oil now trades for $97… a 7% short-term drop.
Why such a quick reversal?
Last Friday’s disappointing jobs report sparked fears over the strength of the US economic recovery. A mere 115,000 jobs were added in April- much less than analysts’ expectations.
Slowing job growth is a clear sign the US economy is sputtering.
Clearly, this news isn’t what commodity investors want to hear. But the good news is, it does increase the chances of another round of quantitative easing. The more red flags Ben Bernanke and the Federal Reserve see, the more likely QE3 will come to pass.
We’re out of the oil market for now, but be ready to buy back in at lower prices. Of course, I’ll let you know when to pull the trigger.
Again, congratulations on a great trade in USL!
GRAIN COMMODITIES
Corn remains in a holding pattern…
The price of this essential food commodity is stuck in a trading range between $6.30 and $6.00 a bushel- close to a 52-week low. Now, don’t get fidgety just because corn hasn’t rallied yet. This trade may take a few more months to evolve into what we’re looking for.
Remember, we’re expecting higher corn prices due to the USDA’s projection of a multi-decade low in ending corn inventories later this year. The only reason corn prices haven’t rallied yet is due to an expected bumper crop for US corn.
But a lot can happen between now and harvest time…
In fact, I’m already catching wind of farmers switching from corn to soybeans for this year’s crop. Soybeans are more attractive for some farmers since prices are at 52-week highs. If more farmers switch to soybeans than the USDA realizes, the huge corn crop the USDA is expecting may fall a bit short of expectations.
So let’s be patient and allow this trade more time to work. Keep holding CORN for higher prices.
INDUSTRIAL METALS
Economic uncertainty has industrial metals waiting in limbo. Both copper and palladium are trading in tight ranges as investors await more information on the health of the global economy.
As you know, we’re currently long palladium via the ETFS Physical Palladium Trust(PALL). Palladium easily has the most bullish supply/demand fundamentals in the industrial metals space right now. Let’s remain patient and keep holding PALL for higher prices.
PRECIOUS METALS
As I’m sure you’re aware, we stopped out of our SLV trade. The silver ETF closed below the $30.00 stop loss I set in the last update.
Obviously, this isn’t what I had in mind for this trade. But it’s clear investors aren’t ready to take the shiny metal higher right now.
Bottom line… we don’t want to fight the prevailing trend of the market. If silver wants to fall, let’s let it fall without us on board.
Friends, I always keep a close eye on the silver market. When I see something that warrants us getting back into this trade, you’ll be the first to know. I have no doubt silver will return to a strong bull market sometime later this year.
The same goes for gold…
We’re still in our PHYS trade, but it’s quite obvious gold isn’t ready to roar higher right now. Additionally, the long summer months are a seasonally weak time for gold. So we may not see another push higher for the yellow metal until later this year.
Let’s be patient with our gold trade for now and keep it at a hold. However, if PHYS breaks below $13.40 in coming weeks, go ahead and close this trade. I’m willing to take a small loss on gold and silver in order to buy back in at lower prices.
SOFTS
Unfortunately, sugar broke lower in recent trading. As a result, our SGG position hit the $79.00 stop loss level I recommended in the last update.
As you know, this trade started off nicely with gains as high as 11%. But a bearish mixture of factors, including a drop in the Brazilian Real and favorable South American weather, were enough to send the market lower last month.
Unfortunately, not all of our trades are going to be winners. This and our silver trade are instances where it’s best to control risk and wait for better opportunities.
Cocoa, on the other hand, is on the upswing…
In fact, we’re just about back to our original NIB buy price of $32.37. I remain strongly bullish on cocoa due the International Cocoa Organization’s (ICCO) projected supply deficit later this year.
If you haven’t already, buy the cocoa ETF up to $32.37.
LIVESTOCK
The mad cow disease scare from a few weeks ago knocked the spots out of the Live Cattle market in April. Prices dropped from $1.20 a pound all the way down to $1.12 in a matter of days… a 6% drop.
However, much of the drop is simply a knee-jerk reaction. Selling is likely overdone and cattle prices should rebound from these oversold levels.
- This month we’re adding natural gas (UNL) to the portfolio. See above for all the details.
Category: Commodity Trading
