Opportunities for Both Shorts and Longs in Natural Gas

In early September, I voiced my concerns on natural gas over-supply in Commodity Trading Strategies: Profiting from Gold and Natural Gas. As things would have it, the price of natural gas staged a scathing rally gaining over 35% through mid September.

Today’s inventory report brought back concerns of an oversupplied market. The U. S. Energy Department’s Energy Information Administration reported that natural gas stored in the lower 48 states amounted to 3.589 trillion cubic feet, an all-time seasonally adjusted high. Natural gas inventories are 491 billion cubic feet higher than they were a year-ago and 481 billion cubic feet above their five-year average. Inventories are in fact pressing against EIA’s estimated peak storage capacity of 3.9 trillion cubic feet.

The spot market reacted quickly and decisively in response to this inventory data and the spot price of natural gas fell sharply. Futures prices of natural gas have been somewhat more resilient. Hopes of a cold winter and a recovering economy have helped contain the damage here. Natural gas for November delivery trades at a nearly 60% premium to the October spot price.

Despite concerns on the strength of the economic recovery, most indicators suggest that the worst is over. The Institute for Supply Management's manufacturing index has exceeded the 50 threshold for the second straight month in September. The Commerce and Labor departments have reported an increase in August consumer and construction spending.

Today’s pullback in natural gas is giving long-term investors one more opportunity to get in fairly close to the rock. Shares of Anadarko Petroleum (APC), Chesapeake Energy (CHK), Devon Energy (DVN) and Canada-based EnCana (ECA) offer ways for the longs to profit from an eventual turn in natural gas. Or, one can get into the commodity through iPath DJ AIG Natural Gas ETN (GAZ).

As for traders, the short side looks more appealing given the massive natural gas inventory overhang.

Disclosure: I do not have long or short positions in any of the securities discussed.