Anticipating A Rise In Natural Gas

Probably the most important thing that any trader can do is to keep an open mind. Preconceptions can be dangerous to your wealth. Making an objective analysis of the prospects of a stock or whatever you are trading, and then believing in the results of that analysis even if they contradict what you thought you would see, is not just good practice for scientists, it is also how traders keep their jobs. I have been reminded of that this week, when I did an analysis of an existing position, fully expecting to find that it was time to take a profit and move on, then ended up not cutting out at all, but actually buying more of the stock.

Back in early May, I wrote a piece here suggesting buying Cheniere (LNG) as a way of playing a possible rise in natural gas prices. That was my chosen way of playing that belief for two reasons. First, there was a good chance of volatility in the short-term, even if my long-term view was correct, so using natty futures could result in a big enough short-term loss that you would be forced to cut the position before NG could bounce back. The second was that the nature of Cheniere's business meant that the trade had a chance of success even if natty didn't bounce very hard. They are involved in transportation and export, so consistently low US prices can actually increase demand for their services.

The above chart for LNG since the publication of that piece shows that, after getting off to a rough start, the trade has paid off. Recently, however, the stock has settled into a worrying pattern of lower highs and lower lows, forming a bearish-looking, downward sloping channel.

That had me worried about my long LNG position, as did the outlook right now for the US economy and therefore stocks in general. The Fed this week reiterated something they had said before, but which for some reason stock traders had decided to ignore for a while. They made it clear that not raising rates at this week's meeting was a pause, with more hikes likely before the end of the year. They also indicated that even when they do stop, they won't be in a hurry to start cutting. Low interest rates have driven much of the economic growth since 2010, so "higher for longer" can't be good news for the economy, nor stocks.

With that at the back of my mind and the sinking feeling that came from looking at the above chart, I got ready to sell my holdings of LNG and bank a somewhat disappointing profit of around 8%. As is my practice, though, before doing so, I looked at the stock and asked myself a question. If I had no position and was considering buying it now, what would I do? The answer surprised me a bit. I would probably see the pullback from the high achieved early last month as an opportunity and would be a buyer.

The thing is, the bounce back in natural gas that I expected back then hasn't really materialized. US output fell as expected as the impact of much lower prices kicked in, but those lower prices didn't stimulate demand at the same time. As a result, as the EIAQ's chart shows, natural gas in storage has increased significantly since the middle of the year, even with lower output than we saw in H1.

There is a strong seasonal influence on natural gas stocks, as you can see from the chart, and it is starting to look as if, as we get into the expected fall decline in gas stocks, we will begin from a lower point than we have for a few years. That certainly doesn't mean that prices will rise for sure, but it does make it much more likely.

So, while the nature of Cheniere's business has enabled the stock to show some gains while natty was bouncing around at a depressed level, the jump in natural gas prices that I envisaged back in May could well be coming soon and, if it does, LNG will move to new highs, and I am positioned accordingly.