June 11, 2010 – Don’t Get Sucked Into Natural Gas

Featured Trades: (UNG), (NATURAL GAS)

3) Don't Get Sucked Into Natural Gas. When natural gas was trading at $6 at the beginning of the year, I warned readers to stay away because it would take years to discount the discovery of a new 100 year supply through the new 'fracting' technology (click here for the call). Gas then launched into an agonizing, three month plunge, where it lost one third of its value. The ETF (UNG) did even worse, spiraling down 38%, as the widening contango decimated investors. (For an explanation of how this works, please click here ). Since April, battered CH4 has rallied 25% off its $3.80 low. Talking heads on TV have explained this is because of the coming summer power demand from conditioners, the onset of the hurricane seasons, the imminent passage of a gas subsidies in congress, or because of crude supply shortages caused by the deep water drilling ban. Don't believe a single word of this. The reality is that hedge funds that had been running big, successful shorts in natural gas had a terrible month in May. Margin calls from other losing positions, especially shorts in the Treasury bond market, have forced them to free up cash by buying back natural gas. The supply overhang and storage shortage for this diminutive molecule is still as bad as it ever was. If we can make it back up to the last cycle high of $6.20, I think natural gas would be a screaming short again.