Natural Gas Prices
The Smart Profits Report: Issue #336
Thursday, July 27, 2006
Natural Gas Prices: The Natural Gas Market is Set to LEAP in the Months Ahead
By Karim Rahemtulla
Chairman, Mt. Vernon Research
With this summer bringing unbearable heat to most parts of the U.S., I’m thankful to be writing this in the fresh, cool air of western Canada. I’m currently in Vancouver, where I’m speaking at the Agora Wealth Symposium, before jetting off to speak in Calgary and then in Toronto.
But the intense summer heat has got me thinking about other extreme events at this time of year. Besides the heat, with August around the corner, we’re now approaching the most intense period for strong, damaging hurricanes. In turn, that raises the specter of an equally strong rally in the natural gas market.
While both these events are enough to make many investors feel queasy and worry about the damage they’ll inflict on their portfolios, my LEAPS Trader and Income Trader members are well-positioned to take advantage of any upheaval. In fact, we’ve actually placed our bets on this occurrence and stand to churn out quite a hefty turn if natural gas prices move higher in the months ahead.
The futures markets certainly seem to think this is a likely scenario. With the threat of disruption from hurricanes looming and winter also just a few months away, prices currently show that gas prices could soar this winter.
Take Advantage of The Natural Gas Market Today
In recent history, natural gas has traded at a ratio of about 6 to 1 versus crude oil. This means that if crude were trading at $20, natural gas would be around $3.50.
But today, that ratio has declined to about 13 to 1. This means one of two things: Either crude oil is overvalued, or natural gas is undervalued.
Only history will judge which is true. But for now, all we know is that crude oil prices appear to have established immense support in the $60-$70 per barrel range. The market has tried all year to break back down below $60 - but it’s not happening.
And it’s easy to see why:
- The most recent Middle East crisis
- Continued strong growth in China
- Massive geopolitical uncertainty across the globe is not showing any signs of easing.
Compound the situation by possible natural disasters that could temporarily crimp supply… and you can understand why there is so much risk premium in crude oil.
So if you’re looking for a “cheap” commodity play, then natural gas is the one with the most potential in the months ahead. Right now, it’s trading at about $6 per thousand cubic feet (Mcf). But the futures market shows that prices will spike to $10 by the winter months…if there are any disruptive events this summer.
The question is: Which investment vehicle do you use to play the market?
Play LEAPS on Two Companies with Plenty of Upside Potential
In this case, my favorite way to play the natural gas market is by using LEAPS options. These options allow you to control shares of a company for a year or more. And, as the current price, compared to what the futures market shows, natural gas investments are currently on sale.
I have a couple of stocks for you to consider…
Chesapeake Energy (NYSE: CHK) and Encana (NYSE: ECA) are two of the best run, low cost operations in the world. Both companies are trading down from their 52-week highs, with Chesapeake in particular having two key positive factors in its favor:
- Chesapeake Energy has hedged more than 80% of its natural gas production at prices above $9 per Mcf - a very astute move on its part.
- In addition, the company has enjoyed some of the highest levels of insider buying of any stock on the market over the past several months, with Chairman Aubrey McClendon and President Tom Ward gobbling up tens of millions of shares between them.
Company insiders simply don’t invest millions of their own fortunes into a stock unless they think it’s poised for some significant upside. Since they know more about their company than anyone else, strong insider buying is one of the best indications that a stock is robust.
Don’t Miss the Boat on Commodities-Based Gains
If your portfolio is light on commodities, or you feel you might have missed the boat on commodity-based gains, fear not. You still have the opportunity to speculate on one of the most volatile commodities on the market.
The kicker? You can do so while it’s relatively “cheap” on a historical basis. And best of all, you can do it with very low risk by using LEAPS options.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- Ignore the powerful profit potential of commodities at your peril. This is one market that should enjoy plenty of upside for the foreseeable future. Find out how you can take advantage by creating your own commodities-based “Mini Hedge Fund” in Smart Profits #114, Commodities: How to Create Your Own ‘Mini Hedge Fund.’
- Discover the many benefits that LEAPS options can give you, including increased leverage and lower risk. Take a look at Smart Profits #121, LEAPS Vs. Stocks: How to “Own” Almost Any Stock for Pennies on the Dollar
Related Articles:
- Using LEAPS: These Options Are Set to Run Full Tilt
- Event-Driven Markets: The ONE Case for Using Short-Term Options
- The Best Commodities Website on the Internet
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