Traders Turning to Natural Gas 13 comments
June 05, 2009
By Chris McKhann
There was plenty of talk yesterday about the gap between oil and natural gas, and it attracted the option traders.
Oil has been much discussed in the press as its price has rebounded sharply, but the fact that natural gas has not been doing the same garnered attention yesterday. Traders may not want to play the futures, but they can use options in exchange traded funds such as the U.S. Oil Fund (USO) and the U.S. Natural Gas Fund (UNG).
The UNG options had 148,000 contracts turn over yesterday, more than twice the 20-day average, and presumably driven by all of the talk of "underpriced" natural gas.
The USO has roughly followed course (or the lead?) of the equity markets, as it has climbed from a low of $22.74 back in late February to its current price of $37.69, its highest close since December. UNG, on the other hand, hit its low of $12.69 on April 30. It has been rallying but closed yesterday at just $14.57 after posting a lower high last week.
The theory is that natural gas will have to rebound with oil, and some are using options to make that play. Of course, even if the thinking is correct -- which it hasn't been so far -- the timing could be dangerously off, especially when using options.
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Divergence Between Natural Gas and Oil Prices at Extremes 4 comments
June 05, 2009
The divergence between natural gas and oil prices is at extremes. Oil prices have roughly doubled since early March lows yet natural gas prices continue to fall. This difference in prices has not been this wide since 1990 suggesting a long gas short oil trade, yet is may come from falling oil prices rather rising gas prices.
The number of rotary rigs for drilling natural gas has been cut in half from more than 1600 to less than 800 according to data from Baker Hughes, yet gas stocks continue to rise due to
week demand and strong supplies. Industrial demand accounts for nearly one-third of natural gas-deliveries each year reports the EIA and rising supplies from unconventional gas fields such as Barnett Shale in Northeast Texas are upsetting the balance in the market.
Technological advancements including horizontal drilling have led to increased supplies at the expense of prices and hurts the marginal suppliers that dominate the Canadian market says James Cole, portfolio manager at AIC Ltd who remains bearish on the sector. Gas in storage increased again at the end of May and stands at 21.6% above the five year average ending 2008.
Despite the gloomy picture, one analyst thinks that the "seeds" of a natural gas recovery are "germinating" due to spending cutbacks based on weak pricing. Richard Wyman of Cannacord Adams believes that reduced drilling activity will eventually allow bombed out natural gas prices, trading at $3.80/MMBtu down from a high of $14 last year, to recover.
Wyman recommends positions in low-cost operators with strong balance sheets because the timing and magnitude of the recovery is uncertain.
Given the sorry state of the market, playing it safe sounds like very good advice.
NYMEX Natural Gas Henry Hub Future Open End Zertifikat, NL0000447332 / ABN4L1
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Frankfurt:
United States Natural Gas Fund, LP (UNG)
Natural Gas ETF (UNG) Activity Catching Up to Oil (USO)
by: Bespoke Investment Group
June 11, 2009
While you wouldn't expect it from the price of natural gas, trading in the natural gas ETF (UNG) has recently become extremely active. For much of the last few years, investors who wanted exposure to energy related commodities bought [[USO]. Over the last several weeks, however, investors have been increasingly flocking to natural gas. Over the last 50 trading days, the total dollar value of trading in UNG has risen to 77% of the dollar volume in USO, and it is up over 900% from levels we saw in March (7.6%). For all the new buyers of UNG, if only the price of natural gas could follow suit.
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