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Natural Gas: Oversold and we are buying

August 28, 2008 11:05 pm

* Recently, we bought U.S. Natural Gas Fund (UNG) for The Disciplined Investor Managed Growth Strategy portfolios…

Below is an interesting graphic that shows the effect on energy commodities by the legislation that closed the Enron Loophole. Even though there has been a great deal of discussion concerning the supply and demand factor, specifically related to China, it is clear that since July, the precipitous fall of energy commodities is not due to a reduction in demand. Supply/Demand had little to do with what occurred. It was rampant manipulation and speculation, and this graphic provides more proof.

The chart shows the percentage change of the three energy related ETFs (funds) that track natural gas, crude oil and heating oil. Of those, natural gas has fallen the greatest amount (37% down) as is appears that it is not the main target of speculators any longer.

Basically, even as there are arguments showing that there is plenty of supply of natural gas, the demand for cleaner burning fuels should continue to grow. Demand should continue into the future. Although now it may be at a more normalized pace. So, the timing looks right to begin to enter a position of UNG at these levels.

From my recent MSN Strategy Lab commentary:

All that aside, it still seems likely that clean-burning fuels will be much sought after and natural gas is going to see increased demand. After climbing more than 50% from January into July, United States Natural Gas Fund has dropped just as fast. Now resting just off its consolidation levels, natural gas prices have fallen 30% since the so-called “Enron loophole” was closed for natural gas and heating oil. This is now a demand play, and I’m adding it to provide diversification to my Strategy Lab portfolio and hedge the potential for runaway energy prices.

(Click chart to enlarge)

 

 

UPDATE: We sold this position via a sell-stop later the SAME day the position was entered. (7% sell-stop was applied on purchase)

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Written by Andrew Horowitz · Category(s) Long Ideas, Markets, Stocks, Strategy    |  Tags: • •   

7 Responses to “Natural Gas: Oversold and we are buying”

  1. DAVE MAY on August 29th, 2008 10:51 am

    what effect will the huricane(s) this wk end have on the price of Nat gas?

  2. Jon Lawson on August 29th, 2008 8:57 pm

    Option volatility was at its high of the year on Friday. It may continue on monday. It led to a number of fine bullish premium selling strategies. Selling put spreads, Broken Wing Butterflies, and balanced butterflies.
    Thanks for the heads up on this opportunity.

  3. Bob Mitton on September 2nd, 2008 7:21 am

    Andrew,

    Thanks for everything you do for the disciplined investors out there. I Love the Podcast and your site. I have been looking very closely at natural gas for quite some time and have decided to look at the ETF as a way to further diversify my portfolio. It looks like this should be a long term cyclical play as our demand for cleaner sources of energy does not look to be subsiding any time soon. The ETF has pulled back to $33.82 and looks to be oversold from where you even took your position and then prompt exit. How do you feel about where it is priced now and do you have any thoughts about where we head from here and when the fundamentals of this thesis might begin to make a turn? Your insight is greatly appreciated.

    Best Regards,

  4. Andrew Horowitz on September 2nd, 2008 1:46 pm

    Bob:

    I would be careful, but a LONG term investor could see this as an interesting point to look to enter….

    Volatility will be key..

    A

  5. Shawn on September 2nd, 2008 5:49 pm

    I’m having a hard time understanding protective stops. I look at UNG and I think a tight stop because support hasn’t been established, but then I think a greater stop of about 10% would be in order because of volatility. Is there a good way of thinking with reguards to tight stops or greater stops? I have this same problem when I’m deciding to get out of a stock.

  6. Jon Lawson on September 2nd, 2008 11:26 pm

    Shawn, price action around a previous low is a tell. Does the price shoot below a previous low (taking out other people’s stops) and then move up. Or like today does the price drop below a previous low and close below. There is nothing to suggest we have bottomed here. Be patient (disciplined), and look for the price to find a base.

    At this point there are 3 tropical storms off the coast, this may cause another spike in the price, but I wouldn’t be putting any significant money to the long side.

    I put some money to work in the form of options, however I exited half my positions for a small loss. I don’t like the price action at this point. I agree with Bob that we will be using more Nat Gas in the future, but I wouldn’t be buying without having a stop in place or at least a married put position to reduce my risk.

    best regards,
    Jon
    Breckenridge, CO

  7. Andrew Horowitz on September 3rd, 2008 1:10 am

    Jon:

    Thanks for the comment and insight, you have excellent points.

    Shawn:

    Look at the longer term and the potential for where you believe ( calculate) price to be in the future. If you have that concern about stops hitting, perhaps you may want to consider a different stock/investment. There is no rule that says you have to invest…

    Today was a classic short cover that faded… not encouraging.
    A

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