We have been drawn to the merits of natural gas due to all the pessimism that surrounds it. As the words – “when they are crying I’m buying”, ring in our ears so too does “invest at the point of maximum pessimism” (a famous quote from John Templeton). The truth be told, we are really struggling to find any bulls of natural gas. We find that anytime we put on our bullish natural gas “hats” the bears come out of the closet and fiercely remind us of how bearish the prospects for natural gas are. The bears cite the rise in natural gas stocks as the basis for their bearish outlook for gas. We have found that analyzing natural gas stocks gives little insight into future movements in natural gas prices, i.e. inventories are a lagging indicator. Our bullish “proposition” for gas is based on:
- The general rise in commodity prices as evidenced by the multi-week high in the CRB Index….the bullish forces at play in commodities are likely to drag natural gas higher over the coming weeks.
- The crash in US Gas Rig Count (as per the chart below from Baker Hughes data). The Baker Hughes Gas Rig count has collapsed from 1600 last year to just over 700 now. Whichever way you look at it there has been a total collapse in supply. Sure natural gas inventory is currently about 22% above its 5 year average……however, if demand does pick up (and we have good reason to believe that it is about to do so) we believe that these stocks of natural gas will fall very quickly due to the inelasticity of supply (it takes a long time to turn rigs back on again after they have been turned off).
Note the extent to which commodities in general have outperformed natural gas over the last 3 years from the chart below. From a medium term perspective at least natural gas appears to be cheap when compared to commodities in general. Yes this is rather simplistic…..but perhaps it is not as simplistic as you may think!
Technically traders are likely to be watching for a break above the 4.50 level. This is very significant because above this level a technical bull market will be signaled which is likely to bring considerable more players to the game……and turn fundamental bears into fundamental bulls. Yes markets have a strange pull on ones bias and emotions. We believe that “fundamental” outlooks are often driven by price moves themselves.
We have enough evidence at hand that suggests a long term cyclical bottom is in the making and that the next move of significance for natural gas will be to the upside. This may not be the exact bottom in natural gas but we are prepared to be wrong before we are right and want to get into the market before “technical” buy levels are breached. If this does prove to be the bottom of the market well that is great…..for once the gods of chance were on our side. Of course only time will tell.
