The Natural Gas Play To Start The Year

For most of 2016, we searched for value in oil stocks, while ignoring natural gas. But while I believe oil stocks will have a great 2017, I also see terrific value coming in natural gas stocks at various times during the coming year. One of those moments, I believe, is now.

We had an interesting end for natural gas in 2016, as prices spiked overseas, sent higher with the intensity of the cold weather in Europe. While the Arctic has experienced one of the warmer starts to winter on record, that has been balanced by the historic cold that began in the Russian Siberian plains and has been sweeping westward through Eastern and Western Europe. The big move upwards in European natural gas, while it should have limited effect here in U.S. markets, did instead inspire quite a strong influx in speculative buying towards the end of the year, marking one of the most overall bullish positionings in U.S. natural gas futures we’ve seen since at least 2014.

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I say this is all interesting, because it never fails that markets will look to respond negatively to a majority position, even if the fundamentals are very strongly in their favor. Sure enough, natural gas took a major dive starting on Tuesday, and continuing through Thursday, as markets punished those traders who thought that the strong coming of winter in Europe would translate into $4/mcf + prices in February here in the U.S.

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I continue to call this massively volatile move to the downside interesting because I believe the traders, for the most part, had it right – fundamentally, there are real reasons to believe that the gluts that have plagued U.S. natural gas prices are in the process of clearing, and very quickly so – leaving a grand opportunity right now to take the panicked positions of ‘long and lost’ natural gas traders from them at relatively bargain prices.

Here is a representation of how quickly stockpiles are shrinking here in the US, despite a much warmer than normal November and December:

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It’s fairly rare to see the majority of traders flood into a trade prematurely to the degree that they cause their own collapse, but I believe that’s precisely what we’re seeing here, despite all the fundamentals saying to the contrary that their analysis and instincts were right. It does happen far more often in natural gas than just about any commodity, as even the smallest ‘leak in the dike’, for example the 50+ degree day we had on Tuesday, would be enough to cause the avalanche of panicked longs that we’ve been seeing.

Still, I think it creates a short to mid-term opportunity to buy just about any dedicated natural gas stock you’d like for the next few weeks – with a terrific risk/reward.

My favorites are currently EQT and Southwestern (SWN), but any should react positively to the return to fundamentals that dropping stockpiles and colder weather would suggest, including Range Resources (RRC), Cabot Oil and Gas (COG) and even Chesapeake (CHK).

For today, there’s a quick chance to make some money in natural gas. And I suggest taking it.