Natural Gas – A Buy Setup

Posted by Jack Crooks - Global Investor

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BlackSwan2 Natural Gas –Will it repeat last year’s pattern?

 I noticed this story in The Wall Street Journal today [excerpted]:

 Congressional Republicans and energy-state Democrats are ramping up pressure on President Barack Obama to take steps to open the nation’s spigot of natural-gas exports as a way to weaken Russia’s hand over Ukraine. 

The Obama administration is restricted by a law that creates regulatory hurdles for the U.S. to export natural gas to countries that aren’t free-trade partners. But officials say the current situation in Europe might change the equation. 

Vladimir Putin’s trump card against the West is its oil business, which supplies fully 30% of Europe’s energy needs. But the oil boom in the U.S. could pose a real threat to Russia’s oil monopoly, columnist John Bussey says on MoneyBeat. Photo: Getty Images. 

Screen Shot 2014-03-07 at 4.18.21 AM

                  John Kerry, second right, and Russia’s Sergei Lavrov, behind him, amid officials in Paris Wednesday.

“I would certainly welcome consultation in terms of how to go forward,” Energy Secretary Ernest Moniz said Wednesday at an energy conference in Houston. “This is obviously a very, very serious and important situation.” 

To comply with the export law, the Energy Department must determine that a recipient of the gas is in the U.S. national interest. Over the past few years, as domestic supplies have ballooned, the Energy Department has approved six such applications—out of more than 20 pending—to export natural gas to countries that aren’t U.S. free-trade partners. Most if not all of that gas is going to Asia, where companies can fetch higher prices. Ukraine relies on Russia for about 70% of its natural-gas supplies, and is also a key transit country for sending Russian gas to more than a dozen other European nations.

Then I noticed this natural gas inventory chart from Reuters: It shows a similar pattern of falling natural gas inventories into the winter months, then a rebound in inventories.….

Screen Shot 2014-03-07 at 4.22.06 AM

And as you can see in the chart above, this year’s inventories (gold line) are a lot lower than they were last year at this time. And of course the price reaction in natural gas this year seems to reflect that reality… 

Now take a look at a chart of natural gas prices on the next page, so far, although prices have risen further this year, there is a similar pattern in prices as compared to 2013…

Screen Shot 2014-03-07 at 4.23.50 AM

In the chart above, in both years the rally (inventory bump) started in January and retraced in late February, then rallied (well, prices rallied in 2013 after retracing). So, is this a setup to buy natural gas in expectations of a rally into May 2014? Maybe! It is yet another reason to continue to watch this Ukraine story to see if the US allows for another export exception. 



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