The stock market was focused Thursday on pushing up Nasdaq stocks for flimsy reasons -- the day's "logic" seemed to be debt-ceiling deal hopes, but who knows? Yet, and this has been a theme so far in 2023, an often-overlooked corner of the market showed strength. Yes, natty went nuts.
I'm talking about natural gas.
As of this writing, the front-month (June) natural gas contract is trading at $2.62, a mere 10.9% gain from Wednesday's level. Yes, as I have mentioned many times, natural gas futures are un-affectionately known as "The Widowmaker" among commodities pit traders, owing to that contract's frequent bouts of volatility. While we experienced the down, down, down for the first months of 2023, we may have seen an inflection point here.
The Energy Information Administration releases its weekly gas storage report every Thursday at 10:30 a.m. ET. This week's lower-than-forecast build (99 bcf vs. market consensus for 108 bcf) was all the commodities market needs to start grasping for natty.
But looking at the CME Group's natural gas futures page, we see that the frequent reports of natty's demise that I have been reading over the past 10 weeks may have been exaggerated, anyway. At this moment, the January 2024 contract is quoted at $3.995 per metric million British thermal unit.
Wait ... what?
I thought we had too much natural gas in this country and salt caverns were bursting and we would never have cold winters anymore because Al Gore's other predictions from an "Inconvenient Truth" have been so accurate.
Kidding, of course.
Seriously, Mr. Market is first telling us that weather is not predictable ...by predicting a cold winter for 2023-2024. Secondly, U.S. liquified natural gas export demand has returned to early-2022 levels, as the Freeport LNG export facility is back up and running after the mid-2022 industrial accident there. Thus, the commodities market is pricing in the fact that natural gas is going to once again become a scarce good domestically. We will see on that, but, again, it is my job to exploit these trends, not to explain them.
So, when it comes to NATTY, one of my many model portfolios, and one that I have held open for public consumption (most of the others are proprietary to my firm Excelsior Capital Partners, my asset management clients and my newsletter subscribers) performance has been varied, to say the least. NATTY itself has fallen 8% since I initiated it on Jan. 6.
That performance has been nothing to write home about, and I guess we needed more of Jack Frost last winter. But NATTY, as with all my 10-name equal-weighted portfolios was composed of several subgroups. Their relative performances baffle me.
First, "The Four Horsemen," the core of the U.S pure-play natural gas stocks, which I list with their performances since NATTY's initiation on Jan. 6: Antero Resources Corp (AR) (-16.9%,) EQT Corp. (EQT) (+10.5%,) Southwestern Energy (SWN) (-3.21%,) and Devon (DVN) (-21.15%.) These companies operate in different geographies and have balance sheet idiosyncrasies, but really do the same thing: explore and produce natural gas. So, how can Devon have fallen 21% since January while EGT has posted a double-digit gain? Why has Antero Resources been a dog while Southwestern Energy has hugged the flatline?
Welcome to NattyWorld. I have never seen a more misunderstood commodity. So, I play it in one of four ways:
Just buy The Four Horsemen. If you want long-term exposure to natural gas, AR, EQT, DVN, and SWN give that, common stock volatility be damned.
The Rocks: Natty contains Antero Midstream (AM) and exchange-traded bonds issued by Sempra Energy (SREA) and Tellurian (TELZ) . These high-yielders -- Thursday's yields: AM (8.5%), TELZ (12.6%) and SREA (5.8%) -- all benefit from increased demand for natural gas, and that is what the futures contracts are pricing in. Obviously, as shown by the relative yield, Tellurian is a more speculative play than Sempra or Antero Don't forget, though, that it is natural gas wells in the Haynesville Shale in AR and TX that keep the lights on for Charif Souki and his team at Tellurian, while they continue to search for the financing to complete TELL"s Driftwood LNG project.
The Leveraged ETFs: Yes, I have mentioned the ProShares Ultra Bloomberg Natural Gas (BOIL) in my column before, and, yes, BOIL went bananas in Thursday's trading. Again, let me reiterate BOIL is not a good long-term buy-and-hold, owing to the phenomena of contract roll. BOIL has to constantly replace expiring near-month contracts with second-month contracts, and if the natural gas futures curve is upward-sloping, that results in value destruction. But, hey, I have a Robinhood account just like everyone else. So, in that account I use BOIL as ballast and write call options against it. Those options premia generate cash for me to use for other trades. I rolled that strategy into longer-dated options in the midst of today's 17% jump in BOIL shares.
The Big Boys. Chevron (CVX) and Exxon (XOM) are natural gas plays, as well as black oil plays. Neither has performed well this year, and 2022's long-oil/short-Nasdaq trade has unwound in the past month as the market has adopted a narrative of imminent easing by The Fed (which makes no sense, since The Fed may not even be finished tightening, but, hey, far be it from me to differ from the buffoons on financial television. So CVX and XOM, bolstered by huge dividends and even "huger" share repurchase programs are returning cash to shareholders and re-tracing to attractive buy points for their stocks.
Natty never goes away. Sometimes her price movements make more sense than others, but of course, there are always two sides to every trade. For today, I am long natural gas. Let's see what happens tomorrow.