Natural Gas - Deflated Flatulance

A few months ago several financial advisers and at least one brokerage analyst were touting natural gas, using the  etf  UNG as a vector. Basically they thought the price had bottomed and was about to break out on the upside. One lady was correct for a very short term trade, and I mean very short term, like  2 days or less.

A plethora of reasons were given, and Guido must admit, he was almost dazzled into buying. However one well known analyst slapped Guido out of this dream  in an unintended way. The slap was the analysts' remark that natural gas was not related to the price of oil.

Suddenly Guido remembered this sage advice from an old Southwest Texas oilman - "Oil is king, sonny. Everything else in the fuel business depends on oil's price. Natural gas, coal, ....." It then occurred to Guido that maybe these people were confused in their conclusions.

At the time the oil price was close or at $70 WTI. This was one of the main reasons for the excitement about natural gas. If the price of oil went up so much, the reasoning followed, then natural gas should follow.

Why didnt it?

Well  my guess is that oil's price rise was due to speculation. Natural gas' price due to the lack of speculation. Both oil and natural gas are significantly in oversupply. The price of natural gas, not oil, is a reflection of just how dismal the world economy is at this time.

Yesterday August 31, the Financial Times from London at ft.com had a story by G Myer about the possibility of a collapse in the price of natural gas occurring soon. Mr. Myer says this one time happened in the past in Great Briton when the natural gas price briefly became negative. Yes, that's right. Negative. They literally had to pay people to take it off their hands.

Mr. Myer says the same thing might happen today, because the storage facilities for natural gas are almost completely full. In other words there may soon be no place to put the stuff.

The oversupply in natural gas is due to several factors. But I suspect a main reason is the abysmal state of economies everywhere. Keep also in mind that a few years ago there was a big fall in the natural gas price due to heavy speculation by a hedge fund called Amaranth that went bust betting on a price rise. . I dont know, possibly that trade is still being unwound today. At the time Guido and  a trader considered  by a few to be  one of the smartest, did make a bet in a natural gas price rise. We got out with a less then a 10% loss and didnt feel so smart at the time. But remember, my friends, the most important thing when trading in financial markets is to know when to take a loss. Hopefully I will soon do an article about this.

Winter will be coming soon and perhaps this will boost demand. If the price of natural gas does collapse, Guido will seriously consider it as a speculation. After all,  you buy when no one else wants it.

And then again I might not touch it. There could be better trades, like shorting a full scale bear market that could occur simultaneously.

When asked why he was selling a profitable property, Jakob Aster answered - "Because I can make more money elsewhere."