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UNG a turn-around candidate?

August 14th, 2008 · 4 Comments

We provided you an article from Goldman arguing that the commodities correction is coming to an end, the worst-case scenario is already built in. Althoug it didn’t mention natural gas, There is an EFT that we think offers an interesting opportunity, although our main Asian natural gas play remains InterOil (and we have more reasons than ever to be bullish on that). This one is for the short-term

First things first, what is an exchange traded fund (EFT)?

  • A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
  • By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order.

First, a perspective on natural gas:

  • In late 2006, China for the first time in its history became a net coal importer. This changed the dynamics of the world’s energy market. Korea and Japan, previously importers of Chinese coal, were sent scrambling for alternative sources of energy. What they found in the winter of 2007 was LNG for $18-$20/BTU. China too was a willing buyer.
  • The coal scramble was also felt in Europe. Australian coal was bottlenecked and/or kept in the Asian region. Power outages in South African coal mines made the situation worse for Europeans as they lost out on significant supply. What followed was a ramp in coal prices as coal was shipped off the east coast of the U.S. to willing buyers in Europe.
  • Fast forward to today and enter Russia. Russia’s invasion of Georgia is a dangerous precedent. Russia controls over 25% of Europe’s natural gas and in the winter of 2006 used it as a weapon against Eastern Europe. Russia’s true intent today may very well be to take further control of the world’s energy market. Does one really believe that the Russian government cares anything about 70,000 ethnic Russians living in the mountains of Georgia?
  • If China’s coal deficit is greater today than it was just one year ago and the geopolitical situation is worse, one could conclude that liquefied natural gas [LNG] in the winter of 2008-2009 will fetch a minimum of last year’s $18-$20/BTU.
  • Last year was the year natural gas became a global market. This year it will be reinforced. The market for natural gas has changed and so should one’s perspective.As one watches the price of natural gas collapse in the U.S., is it possible the price remains near $8.00 this winter as Asians and Europeans pay more than two times that price?

Now, an EFT to profit from this (of coarse, we have another interesting Asian natural gas play in InterOil).  It is the US natural gas fund (UNG). The chart is quite interesting:

A couple of remarks:

  1. It has been oversold for quite some time (RSI below 30 for a couple of weeks, that’s quite rare)
  2. The MACD indicator is turning positive
  3. The candlestick indicator of the last two days is turning positive (however, they did that as well a little over a week ago)

Corrections have a habit of overshooting. Those in natural gas, as well as in UNG might very well have as well. A bounce seem likely. Trade with a stop-loss though.

Can we get more info from a broader chart?

Well, it turns out that $37.5 level is pretty important. Five times in the last year did it serve as a support level, the stop loss should be posted there.

Tags: UNG

4 responses so far ↓

  • 1 rory mcgowan // Aug 14, 2008 at 4:56 am

    are you looking at the coal stocks ? I’ve seen on cnbc money managers recomending consolidated energy because of export terminal they own. Is china still looking to import coal? thx

  • 2 admin // Aug 14, 2008 at 5:09 am

    Hello Rory, no, we did notice the coal stock rally from the corner of our eyes, but there is only so much one can follow. LNG for us is king, at least in Asia, for four reasons:
    – it’s cheaper on an energy basis than oil
    – it’s a lot cleaner
    – Indonesia, the regions big exporter is cutting back
    – there is a lot of infrastructure being built to increase capacity in handling.

    It will fluctuate, but the long-term trend is clearly up.

    We have looked at clean oil (and found an interesting play, but we find it quite expensive still and couldn’t find time for a proper write-up yet)

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