Natural Gas

Quoting from timingthemarket.ca

Headline reads, “Storms could disrupt gas sector: Seasonal strength August-October at weather’s whim”.

Following is full text:

Natural gas prices have a history of moving higher from August to December. What are prospects this year?

Thackray’s 2011 Investor’s Guide notes that U.S. natural gas prices have recorded exceptional seasonal strength from August 1st to December 21st during the past 15 periods. The trade was profitable in 12 of the past 15 periods. Average return per period was 42.3 percent. A word of caution! Natural gas prices are volatile. Returns during the past 12 profitable periods were substantial, but losses during the three periods that recorded a loss also were substantial. “Sweet spot” for the seasonal trade is from the end of August to the end of October.

Seasonal tendencies in the sector are influenced by two annual recurring weather related events during late summer and early fall: Warm weather that increases demand for natural gas used to produce power for air conditioning and hurricanes entering the Gulf of Mexico that frequently curtail supply. The Gulf of Mexico is the largest gas producing area in the U.S.. More important of the two events are hurricanes entering the Gulf.

What about this year? Heat in the southern U.S. and Gulf of Mexico has reached record levels this year. Temperatures have remained high for longer than average, a scenario that favours larger and more frequent tropical storms. Weather forecasters are predicting an increase in the number of Atlantic based hurricanes this year partially because of warmer than average temperatures in hurricane inception areas in the Atlantic

during the past few months. A sixth “name” storm for the current season was announced over the weekend. The National Oceanic and Atmosphere Administration (NOAA), a U.S. government entity, noted that the Atlantic storm season annually averages 9-12 named storms of which five to seven storms reach hurricane strength and one to three become major hurricanes. This year NOAA is predicting 12-18 named storms of which six to ten storms will reach hurricane strength and three to six storms will become major hurricanes. Natural gas inventories currently are slightly below the middle of their historic demand/supply range for this time of year. The demand/supply balance easily could be disrupted if NOAA’s forecast proves to be true.

Investors can play the seasonal trade in natural gas in two ways: by owning natural gas directly either through futures contracts and futures based Exchange Traded Funds (ETFs) or indirectly by owning “gassy” equities and equity based ETFs. Direct ownership is not for the “faint of heart” due to high price volatility. In addition, futures contracts and futures backed ETFs assume additional risk when futures contracts are in contango. The easiest way to invest is by owning ETFs that hold a diversified portfolio of “gassy” stocks. In the U.S. the top choice among liquid ETFs is First Trust ISE Revere Fund (FCG US$19.33). The fund holds 30 equally weighted North American oil and gas stocks that focus on natural gas production. In Canada, BMO Capital offers the BMO Junior Gas Index ETF (ZJN $21.63). Units track performance of the Dow Jones Select Junior Gas Index, a portfolio holding 38 “gassy” stocks.

North American natural gas equities and related ETFs are attractive for another reason this year. Junior companies in the natural gas industry are actively exploring and developing additional reserves from recent gas shale discoveries. Successful drilling has attracted the interest of large international oil and gas companies who have been acquiring junior producers at premium prices.

The technical profile for natural gas currently is negative, but is starting to show promise. Intermediate trend is down. Natural gas trades below its 50 and 200 day moving averages. However, support was established last week at US$3.85 and short term momentum indicators are recovering from deeply oversold levels. Strength relative to the S&P 500 Index and TSX Composite has been positive since the beginning of July.

Preferred strategy is to accumulate “gassy” equities and equity ETFs for a seasonal trade that is expected to last until at least the end of October.

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