Friday, April 24, 2009

Natural Gas: Can it Continue to Fall?

I've been following Natural Gas for awhile now and have a position in UNG. Gas has gotten extremely cheap due to falling industrial demand. I've seen a lot of value traders picking up shares of UNG, as the producers can't make money with gas at these levels. I found an interesting article out today with some analyst opinions that I'd like to share:

Natural gas fell to the lowest price in more than six years in New York on concern supplies of the heating and industrial fuel will overwhelm demand this year.

Gas futures have plunged 41 percent since the end of December as orders for goods at U.S. factories decline, prompting companies including General Motors Corp. to shut down production. Industrial and power plant gas consumption each account for 29 percent of U.S. demand.

  • “Until demand picks up and domestic gas production starts to come down more rapidly we’re going to be in this situation,” said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis. “We’re going to have above-average storage levels for the rest of the year.”
  • Natural gas for May delivery fell 11.6 cents, or 3.4 percent, to $3.293 per million British thermal units at 2:06 p.m. on the New York Mercantile Exchange. Gas earlier dropped to $3.285, the lowest price since Sept. 12, 2002.
  • “Commercial and industrial demand for energy will remain weak through the summer,” Stephen Schork, president of the Schork Group Inc., an energy markets consulting company in Villanova, Pennsylvania, said in a note today. “Demand destruction will still outpace supply destruction through this summer and into next winter.”
  • “I keep thinking we’re going to get a bargain-hunting bounce, but we keep trickling lower,” said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. “The fundamentals are terrible. We have record levels of gas and no sign that demand is going to come back on line anytime soon.”
That last comment has echoed most sentiments that I've heard. "Its too cheap and will bounce eventually." Well, it keeps getting cheaper. Producers are shutting down wells at a swift pace (742 active this week vs. 1606 last Sept.). The hope is that shutting down the production will help balance supply/demand, but these reports show it may take awhile.

Right now I'm holding. Its a difficult thing to hold especially when everything else is moving higher, but this is a trade that could take some time. We'll continue to monitor the situation.

Disclosure: Long UNG

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