Sunday, November 14, 2010

Three Ways to Profit From the Rebound in Natural Gas Prices

I love autumn. The leaves start to turn color, and the first hint of winter is invigorating. It is also a great time to peruse each of the financial markets for the shorter term, seasonal trades that are always lurking, if you know where to look, that is. One place that's worth looking at right now is the global currency markets, where a major war is currently being waged. As part of the so called "race to the bottom," the U.S. dollar is down 14% since June. This drop in the greenback has come at a time when a major bull market in commodities has broken out everywhere in the world.

Gold, silver, wheat and corn have all recently achieved multi year highs. Cotton just hit its highest price in 140 years. There has been an exception, however a headline commodity that's been left behind. Indeed, this particular commodity has been in decline for six months, dropping almost daily. But that's about to change. As we move deep into fall, the leaves on the trees will change color, die, and then fall to the ground. But the commodity in question will return to the land of the living, and will head for high ground, generating windfall profits for those with the courage to make their move right now. I'm talking about natural gas.

Natural Gas Numbers
I am a Contrarian investor by nature. So it's no surprise that some of my biggest gains as a professional trader came after I bought something that was so far out of favor that only a lunatic would've followed my lead. I love those trades. Right now, natural gas is out of favor. So out of favor, in fact, that people do not realize the true value of what it represents in the U.S. market. The spot price of a cargo of liquefied natural gas, or LNG, is around $14 per thousand cubic feet (MCF). In the United States, the same British Thermal Unit (BTU) of energy in the form of natural gas is priced around $3.50 per MCF.

The drop in natural gas prices in the U.S. market was so precipitous that, in August 2009, the weekly average price was $2.72 per MCF. I love price differentials like this, because I know that a capitalist will find a way to arbitrage the difference. Let's do some quick BTU conversions so that you can see what is happening here. If you take a barrel of crude oil, and divide it by natural gas equivalent BTUs, you would find that the ratio is 6-to-1.

What that tells us is that one barrel of oil is equal to 6,000 cubic feet (MCF) of natural gas. When you buy LNG on the spot market, it is priced as an equal with a plus or minus differential to crude oil. However, in the U.S. market, that same BTU value of natural gas is currently discounted......Read the entire article.


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