I love finding stealth rallies in the financial markets. These under-the-radar moves higher are ignored by the financial media and therefore by most investors.
Stealth rallies occur for any number of reasons. Primarily, these types of upward moves happen in commodities or stocks that have been beaten down for so long that the public simply loses interest in them.
Right now, a stealth rally is taking place in a commodity that has not been in the headlines for a while. Once a darling of the financial media, this commodity has been beaten down so severely it is rarely mentioned in the daily financial press. After being hailed as the savior of the United States' energy future, this commodity quickly became over-produced. It may have succeeded in revitalizing U.S. energy, but its price continued to plunge lower as the years passed.
In case you haven't guessed it, I am referencing natural gas. The widespread use of fracking created an oversupply of the commodity, resulting in a price plunge.
Recently, however, things have changed. Natural gas is in the middle of a monster upward rally and it's not too late to jump on board.
Allow me to explain.
The stealth rally in natural gas started in March 2016 with the futures price hitting 20-year lows in the $1.68 MMBtu zone. The all-time low for the commodity was hit in the early 1990's with Natural Gas plunging to $1.02 MMBtu. On an inflation-adjusted basis, $1.68 MMBtu was the lowest relative price of all time.
The price soared nearly 100% to above $3.30 MMBtu during the first week of October 2016.
In some ways, the current pattern appears to be historically mimicking a similar price pattern starting in October 1999. Price moved above $3.20 MMBtu then rocketed to over $10.00 MMBtu by December 2000.
To be clear, I am certainly not expecting $10.00 MMBtu prices this time. However, a move to $6.00 MMBtu or above is very possible in the current environment. Here's why:
Natural Gas Is Cyclically Weather-Driven
Meteorologists are expecting a colder winter in the Eastern United States, a region crucial to natural gas demand, due to a weak La Niña.
It is important to note that last winter season was the lower 48's warmest December-February period in the 120-plus years on record, according to NOAA's National Centers for Environmental Information.
The colder weather should act to increase demand for the commodity.
The forces that move every market, supply and demand, are the major factors in the price of natural gas.
Oilprice.com reports that shale gas production has stopped growing and overall gas production is flat, while imports are decreasing in the face of increasing exports.
Data in the Energy Information Administration (EIA) March Short-Term Energy Outlook reveals that the slowdown has resulted in a significantly diminished supply overhang. Experts project supply will move into deficit by November.
The EIA went on to project gas prices will increase to $3.31 by the end of 2017, a price point that has already been hit. The EIA is being overly conservative on price by betting on an immediate return to production.
The reality is that the low prices have made many production companies unwilling to come back to gas drilling, painting a bullish supply/demand picture.
In addition, some experts are projecting it will take 6-12 months for the oil-field service industry to rebuild drilling and fracking crews after demand returns.
Meanwhile, the gas drilling rig count points toward a bullish price increase in the commodity. Right now, there are 92 gas drilling rigs in operation in the United States. This is a full 150 fewer rigs than the record low set in the early 1990's. At current production capability, it will be next to impossible for supply to outstrip demand.
The EIA predicts that U.S. demand for natural gas will climb from 28 trillion cubic feet (Tcf) in 2015 to 34 Tcf in 2040, an average increase of about 1% annually. This demand increase will only serve to help push the price higher.
Many traders mistakenly believe that they have to open a futures account to invest in natural gas. In the not so distant past, this would have been correct. However, with the widespread use of ETFs today, nearly every commodity can be traded with just a regular stock market broker account.
Risks To Consider: Trading commodities can be perilous. Even with the use of an ETF rather than the futures, expect high volatility due to the nature of natural gas.
Action To Take: Buy the United States Natural Gas Fund ETF (NYSE: UNG) below $8.30 per share. My target price is $15.70 per share, and I suggest initial stops at $6.23 per share.
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