I will begin covering March Natural Gas in today’s report. March Natural Gas is down 8.7 cents at $4.847 this morning as I write. The included chart shows that the longer term down trend for natural gas continues despite some occasional short term rallies. The ongoing problem is that there is just too much supply and not enough demand to offset that oversupply. Basically one of two things need to happen to change the course of natural gas, and this is very simple to understand.
- We either need some extended very cold temperatures to increase heating demand, or a late season hurricane to hit the bulls eye south of Louisiana, or for industrial demand to suddenly pick up dramatically.
- Producers need to cut way further back on their production.
The only variable that is in our human control is the producers. We cannot control the temperatures or hurricanes or overall industrial demand in any short period of time. Only the producers can quickly change their producing habits. If none of the things in item #1 above occur this winter, then item #2, the producers better get their act together or else suffer lower prices. Producers are their own worst enemy right now. I do have a fish whacker here for any producers who might want to beat themselves over the head to possibly figure this difficult equation out.
There is one wild card, and that is Congress. The rumor is that the energy bill may have some natural gas incentives included. The problem is that Congress seems to be only focused on the health care bill which could be argued well into the first quarter of next year.
All I know is that pipeline inventories are at the highest in history and supposedly within 70 or 80 billion cubic feet of the maximum they can hold. Where are the producers going to put their gas that nobody needs yet, then?
Now, as a contrarian, I also know that when the news seems to be its worst is also when bottoms are made. Just look back at the stock market this past March. The stock market and the overall economy was supposedly heading for the next Great Depression and now 60% higher in price, people are still scratching their heads on how prices got this high. So we always have to pay attention to what the chart says!! Unfortunately, the chart still says that prices are still bearish. The directional movement indicators are bearish as well.
Yesterday, we finally came out of our disastrous December Natural Gas positions. Let me put together all the positions that we had for the bottom line results.
We were originally long one December Natural Gas at $5.721 which was liquidated on a stop yesterday evening at $4.455 for a gross loss of $12,660.
We were also short one December Natural Gas ($5.50 strike) call from 60 cents which expired worthless. We received $6000 gross gain on that part of the trade.
We also owned the December NGS $5.30/$4.80 put spread that we made a gross profit of $2600.
We also had the December NGS $4.35/$4.10 ratio put spread of which we lost $1480 gross.
And finally we had the December NGS $4.14/$4.00 ratio put spread of which we lost $800 gross.
So the totals were -$12,660+$6000+2600-$1480-$800 = -$6340 total gross loss. This is a much larger loss than I ever want to take, so I will try to avoid that in the future.
Followers should also be long one December 2012 Natural Gas from $7.25. Near term, I will be looking to liquidate this trade at $7.26 GTC.
David Hall
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options can be substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results
