A Good Way to Play a Natural Gas Rally
06/07/2007 12:00 am EST
Natural gas, in a bear market since January 2006, is now forming a bottom and should continue to recover this summer. Gas prices are soaring as supply bottlenecks remain unresolved and crude oil is looking terrific technically, as is Brent crude.
According to the International Energy Agency (IEA), "the world dodged a bullet in 2006" as natural gas prices plunged from a high of over $15 per BTU in late December 2005 to just under $4 per BTU last year, a massive 75% crash. Of course, gasoline and crude oil prices also logged a bad year in 2006—their first calendar-year loss since 2001.
Natural gas is not a buy-and-hold commodity. Natural gas prices are very volatile and can swing in large percentages on a day-to-day basis. Timing, like most things in life, is especially critical for this commodity, [particularly] as we progress through yet another hurricane season in the United States, potentially threatening supplies.But I've got to believe that natural gas prices are about to break out of a tight trading range as supplies tighten. [So,] natural gas is looking good (there’s solid support for spot natural gas around $7.50 per BTU). The easiest, most liquid way to [play this upcoming rally] is to buy shares of the United States Natural Gas Fund (AMEX: UNG). Unlike a futures or futures options contract, which I regard as too speculative for most investors, UNG provides a liquid vehicle to play natural gas, because it represents an investment in natural gas futures contracts: Once you make an investment, your obligation stops right there. There's no margin call and no additional financial obligation if prices head south; instead, [you can] sell the ETF and close your position.
But let's be optimistic. As a contrarian investor, I'm drawn to commodities that are cheap and distressed, not things like nickel or tin, which have already soared more than fivefold since 2001. Moreover, if stocks suffer a long overdue correction this summer, usually the worst time of the year to be invested in equities, energy prices will provide an excellent diversification tool, because there's negative correlation between the two asset classes.
Hurricane season, Middle East turmoil, prospects for a hot summer and a low entry price make natural gas a strong speculation right now. Plus, technically, natural gas looks very attractive with a breakout looming this summer. This is the time to ride natural gas. Please take a position right now in UNG at market and buy right up to $53.65. (UNG closed under $53 Wednesday—Editor.)