TOOL OF THE MONTH

2016-10-26 4pm EDT  |  #nat gas #Einhorn

Natural gas is getting beaten like a red headed step child. A couple of days ago the December 2016 contract was trading at $3.40, but it is now ticking by at just a little over $3 bucks as I write this.

The short term price action has been brutal.

I admit to being long. I have been lugging around a position for many months but haven’t written about it. I was simply too scared as sentiment was through the roof. Everyone and his brother seemed to be positive on nat gas. Even stock pickers like David Einhorn had ventured into the commodity trading pits to speculate on nat gas. From CNBC in May of this year:

Betting on natural gas

The price of natural gas has fallen around 33 percent in the last twelve months of trade and is currently priced at about $2.06 per million British thermal units (MBtu).

Einhorn said Monday he has added 2017 and 2018 futures contracts at an average price of $2.71 MBtu and $2.84 MBtu, respectively.

Both prices had risen by the end of the first quarter and Einhorn expects them to climb further.

“As existing wells deplete, supplies should fall,” wrote the investor.

“Normal weather combined with lower production could lead to a shortage within a year.”

Einhorn is correct with his fundamental analysis. Supply is decreasing, and with some of the much anticipated LNG plants finally coming online, demand for North American nat gas is set to increase. It’s not much more complicated than that.

The problem with this simple analysis is that everyone knew it. Hedge funds bought nat gas at a fierce rate over the past few quarters.

In doing so, they drove the price of nat gas straight up.

Yet we have finally gotten the needed decline to correct the overbought market. It has been brutal and quick, but that’s what corrections look like in bull markets.

We are now experiencing the second day of heavy selling, right into support.

So, apparently not having learned that you shouldn’t try to catch falling knives, I am standing in here and buying more nat gas. I have been waiting for my chance, and I will not shy away just because it looks ugly. But hey, with trading like this, it’s no wonder I am the tool of the month…

Thanks for reading,
Kevin Muir
the MacroTourist