Tuesday, December 9, 2008

Natural Gas, The Trade of The Season

Two weeks ago week natural gas inventories showed an injection of 12 Bcf. This may have been, or is very close to, the last injection of the season. This was followed last week by a drop of 66Bcf. So it appears that inventories have started to decline for the heating season. Historically, prices will rise as the winter progresses.

Natural gas prices have seen a significant collapse after the oil bubble burst in recent months. With the NorthAmerican economy in recession, oil and gas consumption will be smaller than normal.

Natural gas is a potentially very attractive way to park your money. Instead of using money market funds, which in theory are safe (but we know are not now), natural gas offers the possibility of achieving higher returns in a shorter time frame. This can be done when prices rise (winter) or decline (spring, summer), by taking advantage of the ETFs such as UNG, HNU.to and HND.to (which are 2X leveraged).

Chart of inventories (storage):

(please click on image to enlarge)

Latest Storage data:

Price of UNG ETF:

The chart shows that last year the cycle low was in December 2007.

Chart of HNU.to (2X natural gas ETF):

Nothing on the stock market is without risk. One of the risks wit natural gas is if oil drops to $25. Natural gas may drop further, but in the long run, this is a very safe play as gas in the $5s forces companies in North America to shut production down, thus causing the price direction to reverse.

UNG was trading today around US$ 23.00 and HNU traded around CAD$5.00 (approx. USD$4).

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