Finally, all that driving down dusty, bumpy, washboard dirt roads in the Barnet Shale in Texas paid off. The thing about a great trade is that when it works, new reasons to justify it that you never thought of suddenly come out of the woodwork. That is exactly what happened with my decision to sell short natural gas two days ago.
That unloved molecule, CH4, cratered this morning, the ETF (UNG) trading all the way down to $5.07. The value of my April puts soared, jumping 75% in a mere two days. Being a trader all the way down to my DNA, I took the money and run. The gain took the value of my Global Trading Dispatch model trading portfolio up to 1.41% year to date.
I got up at 4:00 AM this morning to call my friends in Texas before they headed off the fields. I wanted to get the lowdown on what caused the catastrophic decline in natural gas yesterday, the sharpest one day sell off in 18 months. What I got was a complete earful, which I will summarize below:
1) Chesapeake Energy’s (CHK) announcement that they would cut natural gas production was complete BS. If you cap a well prematurely you damage the field. You might as well blow it up. What they probably will do is cut back new drilling by 50% going forward. But that does nothing to address the glut of gas that is spewing out of the wells now.
2) The fear is that so much gas will be produced that we will completely run out of storage by summer, leading to a further collapse in prices. While new storage is being built, it will be woefully inadequate.
3) The winter never showed. This has been the warmest winter in a decade, and traditional heating demand for gas has vaporized.
4) Efforts to build an LNG export industry to ship product to China are being slowed by law suits from pesky environmentalists and zoning officials in local neighborhoods nervous about the construction of new liquifaction facilities that might blow up.
5) In the meantime, other companies are in a race to out produce each other to offset lower prices with volume, causing further price cuts.
6) President Obama can promise all he wants about natural gas corridors, but is unlikely to get anything he wants through a gridlocked congress. See a national map of the proposed corridors below.
The pros in the pits assure me that we are not anywhere close to a bottom in natural gas. If we break the ten year low at $2/MBTU, then we could see trapdoor stop loss selling that takes is all the way down from the current $2.36 to $1.75, down 25%. That would take the ETF (UNG) down to $3.75 and the April, 2012 $6 puts up to $2.20, up 340% from my cost. But hey, nobody ever got fired for taking a profit.
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