Watching Natural Gas

We looked last month at the natural gas market and our $9 target for buying US Natural Gas (UNG). While the price of gas looked to us very cheap, we also found little to drive it higher. I wrote, “Probably won’t go much lower. Not much to make it go higher. What to do?”

We decided to watch a while longer while maintaining our price target at $9 “to keep us alert to the fact that UNG is coming into range.” I concluded that the near-term forecast for mild weather coupled with “the overall slack demand picture from the recession, and gas inventory levels running 11% higher than last year and 12% higher than their five-year average, we may be able to buy UNG for well under $9.”

The following week, UNG closed at $8.99. One week after that, Nov. 27, it closed at $9.83. Last week, it closed at $8.64 after touching a new 52-week low of $8.50 on Thursday.

What’s going on? Gas supply is simply overflowing. It hit an all-time high at the end of Thanksgiving week, 3.84 trillion cubic feet, 14% higher than last year and 15% higher than the five-year average. In just a few weeks, we’ve gone from being 11% over last year’s supply to being now 14% over.

Stephen Schork, editor of the energy advisory newsletter the Schork Report, told the Wall Street Journal on Friday, “The bottom line is that you are at the end of November, and you are still putting gas in the ground.” He said it would take an “ice age” to send prices significantly higher.

Seeing no ice on the horizon out my office window, I’m content to watch longer.

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