Natural Gas Is Ready to Rally

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". . .if they're smart, the bears will take their profits now and hibernate for the rest of the year."

There is no shortage of natural gas bears in the investment community. Natural gas prices have been falling for months and so far bearish bets have paid off.

But if they're smart, the bears will take their profits now and hibernate for the rest of the year. Natural gas has bottomed and is ready to rally - big time.

Of course, the bears will argue otherwise. But they're wrong. . .They're letting logic cloud their thinking and it's blinding them to the opportunity in front of them.

Logic says there is a glut of natural gas the market. Logic dictates the oversupply of natural gas should pressure prices lower until the forces of supply and demand deal with the glut. And logic is correct. What the bears are missing here, though, is the market already knows this. The market knows there's a glut. The market knows natural gas prices have to move lower to correct the supply-and-demand imbalance. And the market has already responded.

Last week, natural gas prices dropped as low as $3.50 per million British thermal units (BTUs). That's as low as prices have been in nearly seven years. In fact, $3.50 is widely regarded as the "shut in" price for natural gas. That's the price at which natural gas drillers are better off closing down the well than continuing because it costs more to extract the gas than what the drillers can sell it for.

In other words, natural gas cannot fall much below $3.50 before drillers start shutting wells. Once that happens, the forces of supply and demand start going the other way.

Which is why natural gas bounced off of the $3.50 price level and is now trading at $3.86. The market has already discounted the natural gas supply glut.

Now the market is ready to start discounting a drawdown in natural gas supplies. The drawdown won't happen immediately. Heck, it may not happen for several more months. But the market is a discounting mechanism. Prices will start to increase well before the fundamental factors support such a move.

We should soon see natural gas prices begin to trade more in line with their historic relationship with oil.

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