In the film Caddyshack, Bill Murray's Carl Spackler recounts a conversation with a holy man as such:
"So, I said, Lama, how about a little something, you know, for the effort?"
"He said: 'There will be no tip, but when you die on your deathbed, you will receive total consciousness.'"
"So, I got that goin' for me....which is nice."
When I die, or stop writing about investments, which will probably be a contemporaneous event, on my deathbed I believe I will finally receive the consciousness that allows me to accurately forecast movements in natural gas prices.
CBOE futures traders call those contracts "natty" or The Windowmaker, and I just call them bonkos. I will not digress into a pages-long digression on storage levels, LNG exports, and I sure as hell am not going to try to predict the damn weather.
But when I see overreactions, I take the other side of the trade. Always. Despite my normal conservatism I actually adjusted one of my beloved subscriber-only model portfolios, NATTY, last week and added some juice to it. I jettisoned the bonds and preferreds and added three natgas-futures price -linked ETFS.
(UNG) : United States Natural Gas Fund tracks daily percentage changes in the front-month natty contract
(GAZ) : iPath Series B Bloomberg Natural Gas Subindex Total Return ETN tracks second-month natty futures contracts
(BOIL) : ProShares Ultra Bloomberg Natural Gas. Tracks 2x of an index of natty futures contract movements. Obviously for extremely risk-tolerant investors only.
Yeah, I am all-in. There's just no reason for natty prices to have gone from $9/mmBTU in Spetember 2022 to the low of $2.40 /mmBTU that was reached this week. It is pure speculation. And I am taking the other side.
So, let's look at the big picture.
- Putin is still in Ukraine. That conflict anniversaries on February 24th. It's not ending anytime soon.
- The US largest LNG export plant, Freeport LNG, received approval from FERC this week to restart operations. That will be a slow process, and a full restart may not occur until March, but Freeport's closing after a pipeline incident on June 8, 2022 has been a bone in the throat of the US LNG export industry.
- Reuters, quoting Refinitiv Eikon data noted that US nat gas exports fell 5% in January. We should be shipping this frozen gold all over the planet when it only costs $2.50/m in the U.S., but arbitrage opportunities have been hampered by Freeport's downtime.
This is your bull case. Renewables continue to perform horribly in Europe, because only Al Gore and John Kerry believe that it is sunny 24 hours a day and the wind always blows at full strength. Asia proactively buys natgas to prepare for next winter in countries that are fuel net importers like Japan, and increasingly, India.
And, my old bones tell me, it actually gets cold in the Northeast soon. But California natgas prices have gone stratospheric -- with 300% increase in recent months, although those are forecast to recede in coming wells -- and the pricing benchmark is at the Henry Hub, in Erath, Louisiana, a part of the state that even the most diehard Cajun probably couldn't locate on a map.
Regional dislocation. Pricing inefficiency. Natgas is so full of classic bear traps that I am holding my nose and buying UNG, GAZ and BOIL for my clients this week based on their individual risk tolerances.
And while writing this column I was heartened to read the EIA natgas storage data, which is released each Thursday at 10:30 am ET. A draw of 151 Bcf, with solid drawdowns in the East region. Total natgas in storage is 2,583 Bcf, still above last year's 2,361 Bcf, but heading down to the 5-year average level of 2,420 Bcf, with the West region well below historical averages.
Numbers + market lunacy (as always in natty) + fundamental market change (Freeport reopening) = Buying opportunity. Do it. Buy some natty today!