Spidey-Sense and the UNG

I think we all saw this coming, so today's tape is of no surprise.  Today's massive selloff is an opportunity to put together a good shopping list of equities, Mastery recommends reviewing Dougie Kass' List as well as taking a gander at the much hyped United States Natural Gas Fund, LP(NYSE:UNG)

Are we finally at a bottom for Natural Gas prices?  That's the big question, and if we are then the UNG is the play to make, but everyone is already doing it.

This past week the United States Natural Gas Fund (UNG), the big natural gas ETF, saw extreme volume of over 300 million shares, suggesting that investors are zeroing in on natural gas in a very big way.

The widening ratio between oil and natural gas prices has now reached stratospheric levels and suggests strongly that either oil has become too expensive or natural gas has become too cheap relatively speaking (See the chart just below).   

There are several bullish fundamental factors for natural gas.

- The most compelling is that the number of rigs exploring for natural gas in the US is down 50% from last year at this time, at 700. Industry analysts are predicting a sharp drop in supply resulting from this.

- Oil and gas specialist Tristone Capital out of Calgary is expecting a 7 bcf/d (billion cubic feet per day) drop in production in the US by late spring 2010.  This would be a huge drop.

- Combine this with any increase in industrial demand and the table is set for significantly higher prices.

- An increasing number of experts are explaining how the real, all-in, cost of production, including land costs, are $7 - $9 per mcf (million cubic feet), and twice the price of natural gas right now. Investors who don’t think this can continue should remember the phrase “the markets can remain irrational longer than investors can remain solvent.”

But there are several bearish factors for natural gas prices as well.

- New shale and tight gas plays in the US and Canada continue to prove up huge supplies of low cost natural gas, lowering the break-even price for operators.

- The amount of gas going into storage is almost at record levels - and the rate of injection increases this year over the 5 year average is going up, i.e. demand destruction is still outpacing supply destruction - by an increasingly wide margin. Not by a narrowing margin. Yet. (This is what the bulls are waiting for - watch natural gas stocks scream upwards when that dream becomes reality. 

- The fast growing, low cost Liquid Natural Gas (LNG) sector is a wildcard. It could swamp North American shores as a cheap source of supply or it may miss here completely and end up in Asia or South America.

Fellow Masters, money is pouring into the UNG, shares, puts, and calls, you make the call.

Happy Safe Trading.