Saturday, August 16, 2008

Natural Gas Looks Cheap...Again

in December Trend and Value suggested that Natural Gas looked cheap and anticipated a good rebound. I haven't mentioned the market since it hit my conservative (much too conservative really) price objective in January.

but the same factors that indicated an opportunity last winter have reappeared this month.

1) the COT Reports show a record speculative short position on the nymex market.

2) relative to Crude Oil, Natural Gas is again as cheap as it was last December (little bit cheaper actually).

my hunch is that both these points are related. there's likely a number of funds long Crude and short Gas. probably too many for comfort. this seems likely to get unwound in a pretty chaotic manner. but again, that's just a hunch on my part, so for confirmation I suggest keeping a close eye on the relative performance of Gas to Oil over the next week or two. personally, I'll be watching the equivolume chart of the UNG:USO ratio:

you want to see this stabilise and start to form a little spoon pattern over the next week or two. if the ratio slides much lower from here I've probably mis-assessed the the situation.

these are volatile markets. don't play around unless you Know what yer doing.

(hat tip to the nowandfutures blog for mentioning natgas a couple days ago.)