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A Big Trade in Commodities Is Setting Up Right Now

By Matt Badiali, editor, S&A Resource Report
Monday, August 30, 2010

Put natural gas producers on your watch list... They could be an extraordinary trade soon.
 
As I detailed back in March, natural gas prices are one of the most volatile assets in the world. Although natural gas is used heavily in industry (for making plastics and chemicals), a lot of demand consists of home heating and cooling. This makes it subject to "weather swings."
 
Adding to the volatility is the fact that the Gulf of Mexico region is responsible for 45% of U.S. natural gas production. This hurricane-prone area adds another layer of "weather swing" to the price.
 
Most weather forecasters predicted a heavy hurricane season this year. Since a big storm can shut down swaths of production, traders bid up the price of natural gas.
 
Their hopes drove natural gas prices up 33% from $3.90 per thousand cubic feet (mcf) on May 1 to $5.18 per mcf on June 21... and gave natural gas producers a temporary boost in share price.
 
As you can see from the chart below, however, a lack of storm activity has sent the price back down below $4 per mcf. This drop has hammered natural gas producers.
 
 
Big independent producers like Chesapeake Energy (CHK) are in freefall. Chesapeake shares are down 22% since mid-June. Another big producer, Range Resources (RRC), is down 34% over that same period.
 
Other big natural gas names like Southwestern Energy, Ultra Petroleum, and EnCana are all at 52-week lows.
 
This is simply the boom/bust nature of natural gas at work. (Natural gas royalty trusts have held up relatively well, though. They aren't as sensitive to short-term fluctuations.)
 
Remember, although we have plenty of supply to tap here in the U.S., natural gas is cheap when it hits $3.75 per mcf. We're not far away from that level right now.
 
If natural gas declines a bit more... and hammers the natural-gas producers another 10% or 20%, it's going to be bargain-hunting time. The "relief rebound" in these stocks could be extraordinary.
 
Good investing,
 
Matt Badiali




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1048.92 -1.5% +1.9%
Oil 33.02 -1.6% -12.3%
Gold 120.91 -0.1% +28.8%
Silver 18.63 -0.4% +28.5%
US-Dollar 83.13 +0.5% +6.1%
Euro 1.27 -0.8% -11.5%
Volatility 27.21 +11.3% +9.9%
Gold Stocks 482.35 -0.9% +32.2%
10-Year Yield 2.55 -3.8% -26.1%

World ETFs
Symbol Price
Change
52-Wk
USA 105.31 -1.5% +1.9%
Canada 26.21 -0.4% +8.5%
Russia 18.02 -0.4% -1.2%
India 32.74 -1.4% +20.5%
Israel 14.54 -0.1% +8.1%
Japan 9.49 -0.3% -7.3%
Singapore 12.14 -0.5% +16.1%
Taiwan 12.23 -1.1% +11.8%
S. Korea 47.92 -0.2% +13.2%
S. Africa 57.96 -0.9% +9.9%
China 39.36 -1.5% -1.1%
Lat.America 44.49 -2.1% +13.0%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 98.77 -1.4% -8.6%
Big Pharma 60.29 -1.1% -6.6%
Internet 55.42 -1.5% +20.4%
Semis 11.59 -2.8% -7.5%
Utilities 30.67 -1.5% +4.0%
Defense 15.91 -1.3% +2.1%
Nanotech 7.93 -1.4% -23.8%
Alt. Energy 8.53 -1.6% -15.4%
Water 14.71 -2.2% -9.0%
Insurance 14.42 +0.4% +5.9%
Biotech 17.66 -1.6% +4.6%
Retail 15.62 -1.8% +1.6%
Software 20.41 -2.0% +10.9%
Big Tech 43.61 -1.0% +7.8%
Construction 11.06 -2.4% -10.1%
Media 10.99 -2.0% +11.2%
Consumer Svcs 55.06 -1.5% +9.1%
Financials 48.67 -2.0% -6.5%
Health Care 58.31 -1.2% -0.3%
Industrials 52.29 -1.6% +8.8%
Basic Mat 58.02 -1.6% +12.4%
Real Estate 50.51 -0.9% +22.9%
Transportation 74.58 -1.6% +11.4%
Telecom 19.84 -1.3% +10.5%