Natural gas has been the worst-performing commodity this year, falling more than 30 percent since the end of December and sliding to a six-year low in April. Weakness in the U.S. dollar, which has buoyed many commodities, including crude oil, has failed to create a spark in natural gas. While investors haven’t been enthusiastic about the market at this state, I think the fundamentals going forward look great for a rebound. I recommend a call spread to take advantage of higher prices come fall.
Natural gas futures rallied after the latest inventory report from the Energy Information Administration (EIA) showed U.S. natural gas inventories rose 106 billion cubic feet in the week ended June 5, 2009, lower than the consensus analyst forecast. NYMEX July natural gas futures hit $4 per million British thermal units (Btu) after the report.
The market has been plagued with weak fundamentals, with the economic downturn crimping industrial demand. The number of rigs exploring for and producing gas has fallen 56 percent since September. A report by Baker Hughes Inc. on June 5 showed that gas rigs fell to 700, the lowest in over six years. In a report on June 9, the EIA said reduced exploration in the U.S. will cut natural-gas production this year by 1.1 percent.
With the natural gas rig counts declining so fast, exploration and production companies are deferring new projects. This should cause natural gas inventories to start to level off and eventually contract in upcoming months. Therefore, this should help support prices later in the year. I think it’s a good time to establish long-term bullish positions. The chart below shows potential bottoming action.
Natural gas has seen rather steep contango in recent days, where December contracts were trading near $6, more than 60 percent higher than the front-month contract. A sharp contango encourages producers to store their product and wait for a higher price in the winter.
Trade Strategy
Consider buying the October $5/$5.50 natural gas call spread, which costs about $1,300, not including commissions. You might also consider a $5.25/$5.75 call spread, at a cost of $1,100, not including commissions, or a $5.50/$6.00 call spread for about $800, not including commissions. These options expire September 25, 2009.
Feel free to contact me with any questions you have about the markets, or to discuss a customized trading strategy to suit your particular account size and risk tolerance. Ask about our half-off commissions offer for new clients.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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