June 22, 2010 – Natural Gas Indigestion

Featured Trades: (NATURAL GAS)

2) Natural Gas Indigestion. I always thought that a great strategy for a new hedge fund would be to only buy positions from existing hedge funds that were blowing up. That fund would buy securities subject to margin calls and distressed liquidations, which are by definition at six standard deviation extremes. It would not trade very often, but few it executed on would be humdingers. If I were running such a fund today, I would be getting reading to short natural gas. Big bets that natural gas would go down have cost the Bristol Energy Fund and SandRidge Capital 15% in the first half of this month, while five funds run by Morgan Stanley have been clocked for $120 million. There has been a lot of talk about using CH4 to bridge our way to a carbon free economy because it produces half the CO2 that coal does. But virtually nothing has been done to put the infrastructure in place needed to consume the newly found 100 year supply in the US. To burn this simple molecule, you need vastly more pipelines, power plant conversions, and above all, storage, than we have now. Until then, the big production companies, like Chesapeake Energy (CHK) and Devon Energy (DVN) are going to race to out produce each other, praying they can use volume to offset price cuts, creating a huge weight on prices. To hear more about arguments about why you should get sucked into buying natural gas, please click here. If we could just get a nice double top around $6, you might have a great trade here.

Natural Gas - Continuous Contract NYMEX (EOD) Indx