Natural gas has been sliding almost daily now for the past 4 weeks or so very similar to how it was sliding in August. We all know the reason cited for the slide....massive oversupply as a result of new technology that has allowed us to tap into the massive amounts of gas trapped in shale. There's likely a hype factor here with shale. First of all, it requires much higher gas prices than current ones to make shale plays economical. Second of all, not all shale wells are created equal and people are assuming that the recent success of the ones that have been tapped into will apply to the other potential shale plays out there.
Last week the IEA issued a report saying that there would be an oversupply of gas for the next 5 years. Every fund manager I see on BNN has echoed these same concerns and I remember reading a big article in the financial post in August claiming the same thing. The fundamental problem with natural gas has been well advertised for several months.
Whenever I see the "story" for a particular asset class become so obvious and so recognized by all and most importantly embraced by all that's when I start to look for signs of a long term reversal. When gold was near it's LT low 10 years ago the bearish argument was that there was still a very big overhang of supply from central banks that could crush the market at any time. Now we hear the same thing with gas....5 years of oversupply is going to guarantee prices stay low. I'm no nat gas expert but I find it just a little bit tough to believe that we are going to get this 5 year of oversupply when the number of rigs drilling for natural gas is half of what it was last year. It's laughable. I think a lot of supply we are seeing now could be spill over from last year's high gas prices. With rig counts cut in half since it's going to be interesting to see what supply looks like 3 months from now. In addition, what about the potential for a huge increase in demand for gas a result of the clean energy movement and the low price of gas right now relative to crude?
By the way my good friend Schwartz (the fund manager I discussed last week who I criticized) echoed the same oversupply issues and said this about natural gas: "you should only use it as a trading vehicle". Yet another sign of a looming LT bottom in gas. This was the same comment I heard a fund manager on TV say about gold in 2001.
To play the devil's advocate though, I have seen a lot of bottom fishing from retail investors this summer with gas playing ETFs like UNG and they got ran over by it and there still might be a bit of this going on. This is what tends to happen near major turning points....the majority will embrace the existing trend believing that it will never reverse anytime soon and at the same time weak bottom/top pickers who are trying to be contrarian get ran over. Once those guys get wiped out and give up that's when the true turn happens. Mr. Market can be a cruel, cruel SOB.
This is why rather than catching the falling knife it's better to wait for the turn and it will likely require a tremendous amount of patience and discipline. You will likely miss the bottom doing this but you will have the wind at your back and yet still be early in the trend...that's the sweet spot. I went long gas in October because it looked like gas was consolidating nicely and ready to break out after making a strong rally from the low in September. A breakout did happen but it was a false one and I bailed immediately. I still made out with a gain mind you.
The bottom line is this: whenever you see a particular story about an asset class become so well advertised and fully embraced after there has already been a huge move like with natural gas, be on the lookout for a major trend reversal. But you have to be careful because quite often there is a blow-off/panic phase to end the trend. This is why it's better to wait for clear signs that a reversal and have the wind at your back before committing heavily. Get over your obsession to pick tops and bottoms. If you insist on doing so because you are so sure about it, keep it small because the market can and will remain irrational longer than you can remain solvent.
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