For the record, UNG or Natural gas more specifically still remains one of my favorite longer term long ideas, I'm talking more like secular long term as I believe there will be a dramatic energy shift in the US at some point, much like Brazil has moved almost exclusively to Ethanol and traditional gasoline is the alternative fuel now.
While I don't know what the events will be that will get us there, one thing I did not foresee coming and that I think will bolster natural gas as a domestic energy source in the US (besides its immense availability here) is the recent moves by OPEC to crush oil prices. This does not benefit OPEC member states at all, their revenues have fallen off dramatically. While T. Boone Pickens argues he's the expert on CNBC yesterday and that the drop in oil prices is due to a lack of demand which I do believe is truthful in so much as there is a global lack of demand as economic activity slows, I do not think the decisions by OPEC reflect what is really going on in oil and why price has fallen so dramatically.
This all "seemed " to start as a way to punish Russia for events in Crimea and Eastern Ukraine, to drive oil prices lower by using our "allies", the Saudis to quietly increase production despite OPEC which the Saudis admitted to doing, thus driving Russia's huge natural resource revenue stream lower in combination with numerous other sanctions and the effect has obviously been keenly felt if you look at the Russian Ruble as of late with a 50% decline in the currency and Russians out spending their Rubles at a booming pace to convert them in to anything tangible to maintain some value. This is effecting Emerging markets, western banks who have outstanding loans that will likely default, former satellite soviet states with guest workers in Russia expecting to see pain in their countries, and on and on we can go, but that's not the point.
What "may" have started as a way to punish Russia has clearly become a way to dismantle the higher cost US oil producing companies like those engaged in Shale oil. At these prices, it costs US companies more to produce oil than they can sell it for at market and as a result, they are scrapping oil rigs at an alarming pace in an effort to survive this onslaught by OPEC to crush the US oil producing industry which may come as a valuable lesson as world geo-politics realign and old friends become new enemies. One outcome may be to move toward a sustainable domestic energy source that isn't subject to the whims of Opec, that would be something the US has in bountiful supply, Natural gas.
So, as a macro economic theme and perhaps a new secular bull market as other opportunities to expand US natural gas production like European dependance on Russia for a good portion of its natural gas and how easily it can be threatened as we have seen previously over the Ukraine and again now once again over Ukraine, emerge as we do not ship much if any natural gas abroad currently. Who knows how it plays out, but there have been some interesting major changes of character in Natural gas over the last several years and I suspect as these harsh lessons are learned and the US oil industry is crippled with high cost producers run out of town permanently, once again giving OPEC sole control over oil, the US Congress may actually have to turn from the bribes of big oil at the threat of US citizens turning on them as oil prices once again rise after the US producers have been crushed. What good are campaign financing from big oil if the cost sky rockets and the US consumer turns on politicians that take campaign finance money from big oil to protect their monopoly on an energy source that is about as outdated as coal.
In fact, just over a year ago government passed a new emissions law that makes any new power plants constructed moving forward, either nuclear or Nat. Gas, although that was not explicitly stated, the EPA emissions standards that were raised for new power plants rules our "clean coal" technology, leaving only nuclear and natural gas.
Our longer term forecast of a change toward natural gas however didn't come from this fundamental analysis that only developed after we put our forecast forth, it came from the charts and subsequent events have only reinforced what I believe we will see moving forward.
As to the recent slide in Natural gas, I wasn't able to cover it last week as it happened, but I believe it to be a short term event, one that was not easily predicted unless I am able to deploy the same analytical tools to forecast weather as accurately as the stock market, I'm sorry, but I'm not a weather forecaster and it's these types of fundamental events that are not reflected in the charts because they are not known, they are surprises that are only discounted after the fact which is exactly what happened after last Thursday's EIA Natural Gas report at 10:30 a.m. as usual. Today we'll see it at 12 p.m. because of the holiday tomorrow.
Here's what happened...
I'd pay attention to the first chart as the concept of stocks in ranges unable to power through to a breakout and the head fake moves used to create the momentum via a bear trap (I have given numerous examples recently of this concept including UNG, XLF and most recently IWM which we are still in) and even the Crazy Ivan shakeout. Even though Natural Gas is a very different asset than equities or the IWM/XLF, the concept is the exact same because it relies on the predicability of technical traders and their inability to think for themselves and blindly follow concepts or DOGMA that have been taught for over a century. Wall St. is VERY well aware of these concepts and uses them against traders EVERY day.
There were two attempts to breakout, both showed distribution in to them and both failed. At this point, just like the IWM and for the exact same reasons, the inability to breakout on their own, they get some help from a deceiving lever, the bear trap.
In white prices "seemingly" make a bearish turn below the 15 week trading range, but this is a head fake move it hits stops allowing smart money to accumulate on the cheap (thus providing support) and it draws in short sellers who see a strong support level of over 15 weeks broken. Technical traders love to enter trades on confirmation which leaves THEM chasing price , all too often entering at the every end of the move they are trying to catch. THIS CREATES A BEAR TRAP WITH SHORTS IN PLACE, THEIR MOST OBVIOUS STOP LEVELS ARE BACK INSIDE THE RANGE SO ONCE PRICE MOVES INSIDE THE RANGE TO THE UPSIDE, THEIR STOPS ARE HIT AND A SQUEEZE BEGINS, WHICH GIVES THE ASSET (UNG) THE ADDED MOMENTUM IT NEEDS TO BREAKOUT WHICH IT FAILED TO DO FOR OVER 15 WEKS BEFORE HAND.
At both #1 and #2, both breakouts above the range, we had pullback signals and were looking for entries near the lower end of the range. I still have about a half size position I can add to UGAZ long as I was looking for lower prices to fill out the position. The most recent range in yellow to the far right looked like it would be a suitable entry on a head fake move below the range (of 1 -3 days) and a swift move up-following all of the same concepts that preceded this range, just in smaller scale.
However, at last week's EIA Natural Gas Inventories a few things happened.
That's what happened...
November of this year began a strong cold snap, some of you may recall the 7 feet of snow in parts of New York, but since then it has become uncommonly warm, right now as I write this Buffalo, NY which saw 7 feet of snow in November is unseasonably warm at 57 degrees. Boston at 45 degrees, even Chicago is above the freezing mark at 39 degrees- so much for a white Christmas. In Anchorage, Alaska some residents are wearing shorts and t-Shorts as the total snow-fall is some 2 feet below the average for this time of year.
Again, I'm no weatherman, but I do know that Winter didn't officially start until December 21st and runs through March, the possibility or even probability of colder weather remains. While this has little to do with the macro theme, it has a lot to do with a potential new position or in my case an add-to to fill out the partial UGAZ long position that' at about 50% of a full position.
This however is not what caused the volatility to the downside starting on the EIA report at 10:30 last Thursday. EIA reports for Nat Gas inventories have been positive for nat gas prices most of the last year, however something changed with last week's EIA report, a draw of 64 billion cubic feet from stocks , however for the first time they reported that inventories stood +0.2% higher than inventories a year ago at this time, this of two major events is what traders chose to latch on to, the first time inventories were higher than a year ago even though they remain -7.3% below their 5 year average for this time of year.
Inventories have remained higher than usual the last few weeks due to unseasonably warm weather, if the trend continues, the 7.3% below the 5 year average we currently see will start to be chipped away at.
However, traders may have missed the forest for the trees or they may have intentionally done so because they did in fact see the forest and used short term events to allow them to accumulate based on longer term realities and the longer term reality is this...
The day before inventories were released, Governor Cuomo of New York banned Hydraulic Fracking in the state. New York has large Natural gas reserves in the Marcellus Shale that runs through the state, making the actions taken by the governor the most significant region to ban Fracking over health and pollution concerns. It doesn't take much to realize that the unseasonably warm snap pales in comparison longer term to the actions NY state has taken that ban the process by which Natural Gas is obtained and in the largest region thus far effected by such a ban.
While the shale region runs from Virginia to the Canadian border, New York's decision may be an important precedent that lowers the volume of natural gas, then this becomes a simple supply/demand issue favoring higher Natural gas prices, irrespective of longer term geo-political developments and US Energy independence. It "seems" traders focussed on the forest of the .2% higher inventories rather than the news the day before of the NY state ban, although it may be that they actually are taking the long view and using the short term .2% issue to create lower prices to accumulate ahead of anticipated higher prices starting with the NY ban and perhaps others to follow not to mention the geo-political events, although Thursday and Friday saw 300k contracts traded so maybe not, but the overall news, which is why I almost added to the UGAZ long today as the EIA released nat gas inventories at 12 p.m. looks bullish for Nat Gas prices, I just figured we are low enough that a few more hours of 3C data can't hurt, and I'd rather have probabilities in hand which I can't get in an hour than to just jump in, although longer term I think this is very positive.
As Warren Buffet said, buy when there's blood in the streets, that's probably the case in UNG, however I wonder for how much longer with larger geo-political events likely to change US energy policy at some point sooner than later as it now becomes a matter of national security and of course the NY state ban which is big on its own, a simple cold snap can change everything with those two larger events in the background.
Last year it wasn't until January and February that Nat Gas got going up to $6.50. Additionally we are at over 1 year lows, that alone can cause the same short squeeze momentum concept as a head fake move that was not inspired by fundamental events (meaning those that are unpredictable).
Like I said, UNG/UGAZ prices are low enough that if I find there's stronger accumulation, adding to them in the area makes sense so waiting a few more hours for more data as today's EIA report was a mere hour before the close of trade, giving me little to go on, then I'll wait for additional data, but there are at least two pieces of recent data that suggest this may be an excellent buy/ add to area.
First...
And secondly, with the little data able to be collected in the last hour, I used the fastest version of 3C since the 12 p.m. inventories and...
I'll let more evidence either build or not and make a decision, but I like UNG for the long term so I want to be careful about making long term decisions based on short term price action (meaning the recent fall which may actually be a blessing in disguise for longer term traders).
And with that, I wish all VERY HAPPY Holidays. I'll see you on Friday!
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