Last year I recieved a lot of free advice telling me to lock in low natural gas rates.
[It's] doubly important to lock in today's prices before the winter pricing sets in," said Commercial Energy Consultants in December of 2011. Baltimore Gas & Electric urged me to lock in "low rates" around the same period.
But these companies knew damned well that natural gas prices would fall further. In fact, I wrote as much in these very pages.
I was spot-on. Natural gas prices got slaughtered from $3.60 to less than $2.
In that same article, I explained we wouldn't see high natural gas prices over the next year (unless we saw a brutal winter) because demand is not likely to catch up to supply this year.
So it's no surprise that after another $1.50+ drop, the fools are once again rushing out to call the bottom.
Even T. Boone Pickens thinks natural gas prices “are as low as they'll get.” But we know he talks his own book as they say.
Calling the bottom in natural gas here is like trying to call the bottom in housing. We may have spiked off recent sub-2 lows in recent days, but I don't expect it to last. It is true that U.S. natural gas production fell 0.6% in recent months as producers are cutting back on drilling due to tight margins.
But the natural gas glut is at historical proportions and growing. The Department of Energy is pegging gas production to increase by 4.5% this year.
So barring a late May hurricane, there's little chance for near-term upside here, despite Pickens' hopes.
Now that's not to say natural gas won't eventually bottom out...
It will at some point — It's just not a bet I'm willing to make without confirmation.
The Best Way to Trade It Right Now
There are some opportunities here.
One is to buy shares or long-dated call options on Chesapeake Energy. CHK got crushed into oversold territory latly.
As we noted in a recent Wealth Wire Pro report, “despite low natural gas prices, Chesapeake Energy has been hit even harder on news that its CEO has a conflict of interest because he used stakes in CHK wells as collateral for loans.”
“MACD, DMI and W%R all say its oversold, as it trades at the bottom of the lower Bollinger Band. The best way to trade this situation is by buying long-dated calls, such as the January 2013 CHK 17.50 calls at market. As soon as the smoke clears, the stock is likely to move up from here. And I'd rather not have to deal with near-term time decay with the bears battling for further immediate term downside.”
Just days later, shares of CHK spiked from the lower Bollinger Band, and raced to more than $20 a share. We call this the R-4 Trigger bounce.
It's still oversold to this day. And is well worth buying as natural gas sits at historic lows.
A Second Way to Trade Cheap Natural Gas
Here's a chart of Westport Innovations (NASDAQ:WPRT).
These are the guys that make “low-emission engines and fuel systems for light-, medium- and heavy-duty trucks that use natural gas as an energy source,” says Chris DeHaemer.
Even as natural gas companies got slammed on higher natural gas inventory, stocks like WPRT rocketed to heights...
It is estimated that the average long-haul truck that drives 120,000 miles per year at 5 miles per gallon could save $46,000 a year on fuel costs by switching over from diesel to natural gas.
This equates to billions of dollars in savings each year. When you realize that garbage trucks and cement trucks get two miles to the gallon... you can see where it would be worth it to switch over to natural gas as an energy source.
With $4 gasoline becoming so common, natural gas is looking like a surefire bet for truck companies across the nation.
And while the switch hasn't been swift, given the small number of natural gas refueling stations, it's happening. And you need to be in front of it to make money. Companies like Westport are priced to perfection and therefore have inherient risk of a selloff.
Companies like Cummins (CMI: NYSE) and PACCAR (PCAR: NASDAQ) are already seeing big demand for these natural gas vehicles. Clean Energy Fuels (NASDAQ: CLNE) even wants to build a network of 150 LNG truck fueling stations along major truck routes.
Stay Ahead of the Herd,
Ian Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He's the Coach behind Options Trading Coach, a beginner's guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor's page.