Signup for our free newsletter:

Profit from Natural Gas Price Cycles

Written By Brian Hicks

Posted June 9, 2010

On May 19th of this year, $20 Trillion Report Analyst Ian Cooper called the bottom in natural gas… and told his readers to go super long.

In his article “The Ultimate Contrarian Bet,” Ian writes:

      Time to Go Long Natural Gas

You’ve heard it all before: Supply is out-pacing demand… Our ability to horizontally drill for shale gas has made the supply picture seem unlimited… The short-term outlook is bleak…

Those are all fine examples of herd-mentality thinking.

Contrarians like us, on the other hand, keep a close eye on natural gas. Companies like Chesapeake Energy (CHK) have the potential to turn large profits.

Cooper’s call was spot on. Take a look at a daily chart of natty gas:

natural gas chart 0609

As we head into the summer months, now is the time to buy natural gas and natural gas stocks.

The reason to buy now is that every year, summer is the weakest time of the year for natural gas consumption. This sets up a trade for natural gas stocks — buy in June-August, sell in December-January when North American heating demand should have natural gas trading at its year highs.

Last summer, natty gas stocks suffered. But like clockwork, September 2009 saw natural gas experience a large seasonal jump in prices.

In fact natty gas prices roughly doubled from $2.50/mmcf to $5 by January 2010. This occurred even though the market fundamentals for gas were poor. This was a good 4-month trading rally. Easy money in the bank.

Will this year be the same for natural gas traders?

According to energy analyst Keith Schaefer…

Natural gas prices in the US and Canada actually turned up last week, enough to get the market excited.  I see that the market wants this trade to work so desperately. I am not bullish intermediate or even long term on natural gas, so I expect that if there is a rally in gas, it will just be a traders rally.  But like I said, last year gave investors a fantastic seasonal rally in natural gas stocks — as long as you sold in January, the seasonal high.

As a trader, natural gas does have some positive things going for it besides seasonality:

  1. Technically, it had a minor breakout this week. The 28-week moving average for natural gas this week was $4.52. This is just my sense, but as the price neared that level, more speculative fever came into the market that it would break through this level; when it did, natural gas got a pop. And the Canadian market followed suit in sympathy.

  2. The market is clearly willing to bid natural gas up on weekly injections that are only a bit smaller than last year.

  3. It’s possible that at some point in the coming weeks, the cumulative amount of gas going into storage will slip below last year. The market could take that as a bullish point to move up the gas price. U.S. gas is only about 2% above last year’s storage levels at this time. (See chart below).

  4. And U.S. gas prices will certainly get an emotional boost whenever the first hurricane is named.

  5. Coal prices are trending higher, making natural gas more competitive in some areas.

  6. U.S. gas demand is up year over year and crude inventories are declining.

  7. The blowout of a U.S. gas rig in Marcellus shale could bring in new drilling regulations-increasing the cost and time to get wells into production.

The best trade for this decade…

Natural gas might be the best trade for this decade. In fact I’m buying as much natural gas as I can.

And I think you should, too.

In the coming weeks, Ian Cooper will be giving you more opportunities in the natural gas market.

Stay tuned.

Brian Hicks
Publisher, Wealth Daily