News Analysis date published New: 
Thursday, October 11, 2012 - 11:30
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Thursday, October 11, 2012 - 11:30
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Thursday, October 11, 2012 - 11:30

The Commodity Disconnect No One Is Talking About

Thursday, October 11, 2012 - 11:30am

During the past five months, natural gas has been on a tear... Yet nobody has seemed to have notice.

Earlier this year, due to a warm winter and above average inventory levels, natural gas prices fell to as low $1.90 per thousand cubic feet (Mcf). Since then, prices have rebounded over 70% to $3.40 per Mcf.

Normally, that would be good news for the companies that actually extract the stuff from the ground. Unfortunately, that hasn't been the case. Natural gas producers haven't been so lucky.

Take a look at the chart below...

The chart above shows the performance of natural gas vs. natural gas producers -- as measured by First Trust ISE-Reverse Natural Gas ETF (NYSE: FCG) -- during the past five months. As you can see, natural gas has steadily climbed since April, while natural gas producers have lagged behind.

Disconnects like this happen from time to time... Especially in the commodities market.

For example, we saw a very similar disconnect in the gold market back in November 2008. Back then, stocks of all shapes and sizes were plummeting amid the financial crisis, with gold mining stocks suffering an overdone 60% sell-off. But gold stood its ground.

The imbalance didn't stand long. As you can see from the chart below, once the market regained its confidence, gold-mining stocks came racing back.


Back then, shares of GDX fell to below $18 a share. Within seven months, the stock gained 138% before topping out at more than $43 a share.

It's not unlikely to think we could see a similar situation play out in the natural gas market. Disconnects like these don't last long... It's only a matter of time before higher natural gas prices start to effect the industry's bottom line.

When it does, you're going to want to be in natural gas stocks.

Risks to Consider: Natural gas still faces a lot of major headwinds. Due to new technological developments like hydraulic fracturing and horizontal drilling, the gas market could stay oversupplied for several years. If that happens, it could be a while before natural gas producers come back in favor with the general market.

Action To Take ---> If the price of natural gas stays elevated, it's bound to have a dramatic impact on the bottom line of the companies that produce it. The easiest way to gain exposure is with an ETF like First Trust ISE-Reverse Natural Gas ETF (NYSE: FCG). This fund holds a basket of roughly 30 natural gas stocks, each of which would benefit from high natural gas prices.

[Note: If you're interested in a pureplay natural gas company, StreetAuthority's Nathan Slaughter recently profiled one of his favorites in the industry in a recent issue of Scarcity & Real Wealth. If you're interested to learn more about his newsletter, follow this link here.]

Austin Hatley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.