Investors who are looking to the XNG:NYSE Natural Gas Index to tell them the future of  natural gas prices could be making a costly mistake.

XNG:NYSE – which tracks large cap companies in the US natural gas industry – has been heading up for 12 months – in the directly opposite direction as UNG:NYSE, the high profile ETF that tracks the price of natural gas.  It has been going down for 12 months, and set a new 52 week low late last week.

How can two related natural gas charts go in opposite directions for so long?  Which one should investors look to try and make money?

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UNG is supposed to track the natural gas commodity price in the US, based on the near month contract on the Henry Hub in Louisiana.

(There are several natural gas “hubs” where natural gas prices are quoted around the US, but the Henry Hub is what most media quote – and while there used to be a big difference between the regional hubs, increased pipeline capacity around the US has lowered those differences a lot.)

XNG measures the stock performance of a basket of large cap companies in the natural gas industry – but they are not all producers.  Some are pipeline, transportation and transmission companies.

Look at the two charts, which at first blush I would expect to mirror each other – the underlying commodity and the equities that should track that commodity:

So what gives with that?  Does one of these charts have to “give”, somehow?

The short answer is “not really”, and it has to do with how the index is made up, and how some of the companies in the index do business (I’ve listed them alphabetically at the bottom of this article).

Two of them, Kinder Morgan (KMP-NYSE) and Williams (WMB-NYSE) are pipeline companies, not natural gas producers.  Now, the main reason the natural gas price is so low is because US production is increasing again after years of decline.  So it only makes sense that if you are pumping more gas out, the pipeline companies are making more money.

The stock price of Kinder Morgan was going up anyway, but as soon as their Rockies Express pipeline from Colorado to Ohio went live last fall, their stock took off even more.  They’re up more than 50% in the last 12 months.  Williams is almost a double.

Second, several of the producers in the index have been very high profile about transforming themselves into oil-weighted companies as fast as they can find deals and if need be, raise the money.  Apache Corp. (APA-NYSE) spent $5 billion in just one week in April 2010 buying two sets of oil assets in the Gulf of Mexico (Too bad for them it was before the BP spill).  Chesapeake (CHK-NYSE) has been very vocal since February that it wants to become a lot more oil weighted.

On February 25 2010, EOG Resources CEO Mark Papa said it “can no longer be considered primarily a natural gas company.” – and the stock jumped more than 25% in two months!

And of course XTO:NYSE is being bought out by Exxon (XOM:NYSE) for stock, so their stock will track Exxon – the largest independent oil company in the world – until that deal closes.  XTO stock has nothing to do with the price of natural gas now.

And lastly, several of the companies are integrated producers, meaning they not only produce the gas out of the ground, (called the upstream business) but also have pipelines and other infrastructure that deliver the gas to customers (called the downstream business).   As I mentioned with the pipeline companies – they’re doing a lot better.

So, for those reasons, the XNG stock index and the UNG commodity index – even though they’re both tracking different parts of the natural gas industry – don’t necessarily have to have a tight, direct relationship.

Investors could be tempted to look at XNG, and because stocks lead commodity prices – the market usually predicting where prices will be 9 weeks to 9 months out – as a barometer of where natural gas prices could be in the future.  But the XNG has pipeline companies, and several producers who are moving away from natural gas as fast as they can.  It’s not just natural gas producers.

So that investment hypothesis could be a costly mistake.

The XNG index is currently made up of:

APA – Apache Corp.

APC – Anadarko Petroleum Corp.

CHK – Chesapeake Energy Corp.

DVN – Devon Energy Corp.

EOG – EOG Resources

EP – El Paso Energy Corp.

GAS – Nicor Inc.

NBL – Noble Energy Inc.

NFG – National Fuel Gas Company

NI – NiSource Inc.

STR – Questar Corp.

SWN – Southwestern Energy Corp.

UPL – Ultra Petroleum

WMB-Williams Companies Inc.

XTO – XTO Energy

Urgent: Don’t make this dangerous resource mistake is a post from: Oil and Gas Investments Bulletin

Or did investors come to believe that the natural gas price is a runaway train on a dead end track?

Despite a natural gas injection this week (52 bcf) that was smaller than forecast, and quite a bit less last year’s 88 bcf injection (and less than 5 year average injection of 64 bcf), natural gas prices tumbled.

Investors focused on natural gas inventories inching closer to being full. The  fear of natural gas companies having to shut in production en masse, in the near term, took over sentiment.

While the natural gas price tumbled, natural gas stocks, however, did not. The Amex Natural Gas Index was up almost 1%.  That has me intrigued.

Negativity hit a new high today on natural gas.  Look at the volume on the ETFs in the US and Canada.  UNG-NYSE traded had its biggest volume day in two months and set a new low.  Investors were clearly voting with their feet and walking.  In Canada, the Betapro Horizons 2x leveraged natural gas long ETF, symbol HNU:TSX,  had record volume and dropped 10% to dip under $3/share.

These are good indications of capitulation, which is “a volume surge after an extended decline reflects a selling climax or capitulation that exhausts selling pressure”, according to www.stockcharts.com.

 But of course, it could get worse.  Calgary-based, First Energy Capital Corp. Analyst Martin King, was quoted in a Reuters story today saying “This is the precursor to a bit more of a pullback down into the $2.25 to $2.50 range. Producers have to carve back supply, otherwise it’s going to run into a big wall come late September.” 

For me, this is the beginning of opportunity.  The next 6-10 weeks should bring some of the natural gas stocks I have been tracking into buying range. 

Subscribers will be kept updated on any new portfolio purchases.  The most recent purchase has a natural gas play that one analyst showed as having one of the best economics of any play I have ever seen.  I bought shares in the company for its new oil discovery and debt free balance sheet, but once the natural gas price moves up, it will be one of the most highly levered companies – as a low cost producer.

Natural Gas – Was Thurs Aug 20 Capitulation Day? is a post from: Oil and Gas Investments Bulletin

By Brian Hoffman, CA, CPA

Oil prices have made a big move up since March with the recent move to almost US$73 per barrel retracing over a third of the drop from the US$147 peak last summer to the low of almost $US30 earlier this year.

Retracements during market rallies generally recover anywhere from a third to two-thirds of the price drop, so oil prices could run-up as far as US$110 in the near-term before facing serious resistance. 

However, there are several resistance levels that oil prices need to break through, particularly at US$78, US$88 and US$100, for the rally to continue.  As shown in the chart below for light crude oil, the 50-day exponential moving average is about to cross above the 200-day exponential moving average – this is called a golden cross - which is bullish.

Oil prices have outperformed the share prices of oil companies in recent months and further oil price increases could continue to outperform.  Since March, oil prices have gained 93 per cent to their recent peak (see chart for light crude oil prices above), which compares favourably to the gains experienced by the Energy Select Sector SPDR Fund (XLE-NYSE, US$48.05) and the iShares CDN S&P/TSX Capped Energy Index Fund (XEG-TSX, $16.65). 

The XLE and XEG exchange-traded funds (ETFs) gained only 53 per cent and 62 per cent to the height of their recent peaks, respectively, with the XEG ETF receiving additional returns in U.S. dollar terms from Canadian dollar strengthening this year (see charts below).

As I marked on the chart, oil prices could potentially move down to the US$56 support level if the Relative Strength Index (RSI) uptrend line is breached (see bottom panel in the chart above).  RSI is a momentum indicator, or oscillator, that measures the relative strength of a security against itself. 

Alternatively, oil prices could break through resistance at US$78 if the RSI uptrend line remains intact.  I am holding my oil stocks for now, but watching this indicator closely.  I will likely sell some individual positions once this RSI uptrend line is breached.

The XLE ETF’s trend lines for price, On Balance Volume (OBV), which measures the general buying and selling pressure on a security’s price, and RSI have all broken down with the price trend line breach occurring first, which is unusual.  In any event, the technical outlook for the unit price is bearish for now.

The XEG ETF’s trend lines for OBV and RSI are close to breaking down, although the price uptrend line has already been breached.  Similar to the XLE ETF, this situation is unusual and the technical outlook for the unit price is bearish for now.

An affordable way to participate in future oil price movements is through the United States Oil Fund, LP (USO-NYSE, US$38.74), which is an ETF that tracks the performance of oil prices.  Since March, this ETF has gained 82 per cent to its recent peak (see chart above), which is not as good as oil’s 93 per cent gain, although the oil price gain does not reflect transactions costs.

The USO ETF is facing technical difficulties similar to the XLE and XEG ETFs, at least in the short-term, as the OBV and price uptrend lines have broken down, the RSI uptrend line is close to breaking down and there is resistance at US$40.  A safer entry point to buy the USO ETF may present itself if oil prices break down and successfully test the US$56 support level mentioned above.

The USO ETF may test its support at about US$32 (see red line in chart above), which would provide a lower risk entry point for investors interested in participating in oil’s potential ongoing outperformance of oil stocks.

Brian Hoffman, CA, CPA, is an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

Oil Prices Outperforming Oil Stock ETFs is a post from: Oil and Gas Investments Bulletin

Could the natural gas ETF (UNG-NYSE) lose its tracking of natural gas prices?  In one very specific (and quite realistic) circumstance, it could.  And could it possibly skew the real, physical price of natural gas in the US?  Many people say it is doing that right now, which is open to debate.

As background, the volume in UNG has gone from 1,000,000 shares a day six months ago to almost 100,000,000 a day this month – peak volume being 96 million on June 11.  It has become very popular, as millions of retail and institutional investors see the current $3.75/mcf as unsustainable; it must rise to some higher level to meet the cost of production.  Most research analysts say this is between $6-$8/mcf.

The only question is, how long will that take – weeks, months, or quarters.

When all that volume comes into the fund, the fund manager takes that money and issues more units of its fund to match demand so that the Net Asset Value (NAV) of the fund does not change.  As volume decreases, they can redeem units.

When I called the fund Tuesday June 23, the customer service person said the fund (via its charter or bylaws) is allowed to issue up to 400 million units.  At its peak on June 11, the fund had issued as many as 285 million, and had never issued more than 20 million units in a day.  That day it had 258 million issued.

So theoretically, if the physical natural gas price did start to perk up, it could cause a massive trading rally in UNG, and in just a few short trading days the fund could be out of units to issue. Then we have a classic supply and demand situation where the supply runs out – no more units can be issued – and demand is steady or higher.  The price of UNG must then go up, more than the price of gas or even if the natural gas price doesn’t move.  Think of it as a short squeeze in reverse. 

In this instance, the NAV of the fund would be greater than the natural gas price until such time the volume decreased so that the fund had less than its maximum 400 million units issued.

How likely is this? I don’t know.  It would take a lot of consistent volume.  But UNG does attract the volume, as everybody is seeing it as the no-brainer trade of the year, especially as the number of rigs drilling for gas has been cut in half in the last year.  That will eventually start showing up in lower weekly gas injections.

The fund itself freely admits it can “lose track” with the natural gas price – see this note from its fact sheet “There is the risk that the changes in the price of UNG’s units on the NYSE Arca will not closely track the changes in the price of natural gas. If these correlations do not exist, then investors may not be able to use UNG as a cost-effective way to invest indirectly in natural gas or as a hedge against the risk of loss in natural gas-related transactions.”

To combat this from happening, the fund’s manager has asked the US regulatory body for securities, the SEC, to increase the number of shares they can issue to 1 billion, from the current 400 million.   The SEC is still considering the matter.  Reuters reported on June 24 that several fund managers were against the increase, as they saw it as increasing speculation in commodity markets. 

The head of the CFTC (Commodity Futures and Trading Commission) in the US was on Canadian TV this week saying they are aware that several funds or ETFs were over their limit in the number of contracts they could buy (whatever that means) and they were looking into it. ( He looked very serious and I’m sure he meant every word.)

Does the ETF affect the physical natural gas price?  Many people on the web say UNG is already impacting the market, by purchasing more contracts of natural gas than otherwise would ever happen, propping up current front month prices.

There is a good story on this issue from June 25: http://tinyurl.com/neayvn

I spoke to one ETF manager about this who basically said there really is no way of knowing whether natural gas would be $2/mcf if it wasn’t for the ETF buying.  

I do not own UNG .

Could the Natural Gas ETF UNG-NYSE Lose Track of Natural Gas Prices is a post from: Oil and Gas Investments Bulletin

(An ETF, or exchange traded fund, is a security that tracks an index but trades like a stock.)

The two charts tell us that despite all the bearish fundamentals for natural gas in North America (and there are lots!), the time to buy UNG is very near.  The chart for the Canadian natural gas ETFs (GAS-TSX, HNU-TSX) tells the same story.

In February of this year, when everyone thought oil was going to stay at $40-$45 per barrel throughout 2009, the ETF for oil in the US, USO-NYSE, bottomed.  Its downward momentum was matched almost exactly with a rising crescendo of volume from investors.  The ultimate low was still a couple weeks away, but as soon as the volume started to subside, the ETF tracked higher. 

UNG-NYSE and GAS-TSX are now showing signs of going through the same tell-tale crescendo of volume.  This would indicate that investors believe the natural gas price in North America has bottomed, or is very near bottom.

There are several bullish fundamental factors for natural gas. 

 1)         The most compelling is that the number of rigs exploring for natural gas in the US is down 50% from last year at this time, at 700. Industry analysts are predicting a sharp drop in supply resulting from this.  I wrote in an earlier article that oil and gas specialist Tristone Capital out of Calgary is expecting a 7 bcf/d (billion cubic feet per day) drop in production in the US by late spring 2010.  This would be a huge drop.

2)         Combine this with any increase in industrial demand and the table is set for significantly higher prices.

3) An increasing number of experts are explaining how the real, all-in, cost of production, including land costs, are $7 – $9 per mcf (million cubic feet), and twice the price of natural gas right now. Investors who don’t think this can continue should remember the phrase “the markets can remain irrational longer than investors can remain solvent.”

But there are several bearish factors for natural gas prices as well. 

1) New shale and tight gas plays in the US and Canada continue to prove up huge supplies of low cost natural gas, lowering the break-even price for operators.

• 2) The amount of gas going into storage is almost at record levels – and the rate of injection increases this year over the 5 year average is going up, i.e. demand destruction is still outpacing supply destruction – by an increasingly wide margin. Not by a narrowing margin. Yet. (This is what the bulls are waiting for – watch natural gas stocks scream upwards when that dream becomes reality.  The market thought they had a sniff of that yesterday & took natgas stocks higher, even though the actual number was bearish.)

3) The fast growing, low cost Liquid Natural Gas (LNG) sector is a wildcard. It could swamp North American shores as a cheap source of supply or it may miss here completely and end up in Asia or South America.

Almost all research analysts and the talking heads on business TV say natural gas prices will continue to go down through August, and then begin to rebound.  How big the rebound is, is where opinions begin to differ.

These ETF’s are strange creatures in that stocks inherently track the future, they track expectations of financial picture 6-9 months from now. Yet ETFs track indexes that are based solely on current prices.  I think the only way you can see the future in an ETF is by the volume. And that’s what makes the natural gas ETFs so intriguing right now.

If and when I buy a natural gas ETF, I will buy the GAS:TSX.  For my American audience, if gives you a Canadian dollar denominated security, which is good if you think the US dollar will continue lower.  Second, I prefer it over the HNU:TSX ETF by Horizons Beta Pro.  GAS-TSX has no leverage, and does not reset itself every day, and I believe it more accurately tracks the commodity price.  Remember that GAS:TSX tracks the Canadian gas price out of Edmonton, AECO, which can be found at www.ngx.com.  It does not track NYMEX.

Are Oil ETFs Showing Us the Future of Natural Gas ETFs is a post from: Oil and Gas Investments Bulletin

By Brian Hoffman, CPA, CA

Natural-gas prices have shown some strength recently, piggy-backing on higher oil prices.  Although last week’s higher than expected gas storage update is bearish in the short-term for natural-gas prices, the longer term outlook bodes well for significantly higher natural-gas prices.

Although oil prices will also probably pull-back from the recent run-up with the technical outlook turning bearish in the short-term if oil prices breach the US$50 support level, oil prices are likely to remain strong in the years ahead, which will help to support natural-gas prices.

Despite the current over-supply of natural-gas, the supply-demand situation is likely to achieve equilibrium over the next two years that will support higher long-term natural-gas prices.  Supply has increased substantially primarily due to reduced industrial demand during the recession and a warmer than usual winter in the north east U.S.  However, many natural-gas exploration and production companies have reduced their drilling plans for 2009, which will result in less gas going into storage over the next two years.  The supply-demand fundamentals are expected to improve considerably when industrial demand starts to pick up in light of reduced drilling.

The energy equivalency of natural-gas compared to oil is generally 6,000 cubic feet to one barrel of oil, and the price for 1,000 cubic feet (1 Mcf) will generally trade for one-sixth of the price for one barrel of oil during normal times.  As you are well aware, we are definitely experiencing anything but normal times in the current environment.

Over the past two years oil has traded for about 10 to 12 times the price of natural-gas.  With current prices for oil at about US$61 per barrel and natural-gas at about US$3.40 per Mcf, the ratio is almost 18 to 1.  Natural-gas prices stand to benefit from closing the gap in pricing relative to oil prices.

Natural-gas prices have spiked twice in the past four years and accompanied spikes in oil prices – in 2005 after hurricane Katrina hit Louisiana and during last year’s run-up in prices.  Another price spike could occur when the supply-demand outlook improves.

An opportunity to benefit from a recovery in natural-gas prices, particularly a price spike, is through the United States Natural Gas Fund (UNG: NYSE, $13.70), which invests in near-month natural-gas futures contracts.

In the chart below note the significant downtrend in the price of UNG over the past year.  The downtrend is still intact but the price is ripe for a breakout later this year, which could set the stage for a significant trend reversal.

UNG-NYSE Natural Gas ETF

Over the past few months UNG’s chart has formed a right-angled broadening formation, which is an accumulation pattern.  A buy-signal will be triggered if volume expands on a breakout above the top line in this formation, which is at about US$18.  A breakout will be confirmed if the price moves 10 per cent above this top line – to about US$20.

A subsequent pull-back towards the top line of the formation, which would become a new support level, would offer a low-risk entry point.  Although the gain from US$13.70 to US$18 is foregone, the US$18 entry level after a pull-back would reduce the risk of the investment considerably.  Also, breakouts from these consolidation patterns are generally followed by substantially price increases, so the potential increase from the US$18 level is enormous.

Inflation is pending in the U.S. with the government “printing” money to save its economy.  The U.S. dollar is expected to weaken relative to other currencies, including Canada’s petro-currency, and commodities – particularly oil and gold – are seen as hedges against inflation and a considerably weaker U.S. dollar.  As a result, investors need to consider that higher commodity prices in U.S. dollar terms will likely be impacted by a weaker U.S. dollar.

In any event, the outlook bodes well for natural-gas prices beyond 2009 and UNG provides investors an opportunity to benefit from a recovery in natural-gas prices.  The potential for the price discrepancy to close between gas and oil prices adds to the appeal of this investment opportunity.

Brian Hoffman, CA, CPA, is an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

Technical Analysis of natural gas ETF – UNG:NYSE is a post from: Oil and Gas Investments Bulletin

By Richard Reinhard and Keith Schaefer

(This article is appearing simultaneously at Reinhard’s website, www.gsweekly.com. Reinhard is an excellent technical analyst (he can read stock charts) and trader.)

Few investors realize it, but the oil ETF’s give investors a monthly opportunity to make day trading profits on senior oil stocks.

(An ETF, or Exchange Traded Fund  is a fund that tracks an index, but can be traded like a stock. For full definition go here: http://www.investorwords.com/1755/ETF.html)

The United States Oil Fund (USO-NYSE) is now so large, it contains more than 20% of the outstanding March crude oil futures contracts (West Texas Intermediate, or WTI).  Now, being an ETF, it does NOT want to take physical delivery of that oil. So at some point each month – and that would be the 5^th, 6^th and 7^th business days of the month – they roll over their entire set of contracts to the next month – putting undue, abnormal pressure on the oil price those days. The Goldman Sachs Commodity Index does the same thing every month, but on the 6^th, 7^th and 8^th business days. Roll dates are usually published in advance – USO provides theirs on their website.

BetaPro Horizons, which operates the Canadian oil ETFs, symbols HOU and HOD, say they roll over their Light Sweet Crude Oil Futures contracts on the 7^th, 8^th and 9^th business days, but claim their holdings are so small compared to the other two that there would be no impact in the markets from their activity. Still, it would likely accentuate the already abnormal pressure.

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Trading for the WTI contract is open 01:00 London (local time). The close is at 23:00 London time, except Monday morning when the open is 23:00 London time. In other words, well before stock markets open for trading, investors can see what the futures are doing, and will often react to their direction.

How savvy investors can potentially benefit from this event is by buying senior oil stocks, whose performance tends to mirror the oil price almost exactly, with timely at-the-market orders, just as other investors react to the pre-opening WTI futures contract price down-tick as “forced” selling by these ETFs takes place. They can either do this ahead of the anticipated price pressure by selling their stocks at the close the day before, and/or by buying these stocks during the spike-down opening trade. Really aggressive investors may take advantage using the underlying options on these stocks – a tougher trade requiring precision timing and loads of experience.

As an example (refer to the 5-minute Candlesticks charts on next page), let’s look at the trading of Canadian Natural Resources (CNQ-TSX), a reasonably liquid Canadian producer of over 565,000 barrels of oil equivalent per day, with a $30 billion enterprise value. So, USO starts rolling over their contracts early on February 6, before stock markets open. CNQ had closed the prior day, February 5^th, at CAD$44.81. On the open February 6^th CNQ is down sharply at CAD$43.35, and bottoms at $42.55 within the first 5 minutes of trading, and within 15 minutes after the opening was back up to $44.62. It closed the day at CAD$45.43.

 Canadian Oil Sands (COS.UN-TSX), another liquid stock that tracks the oil price, similarly started trading on February 6^th down sharply at $19.62 after having closed at $20.50 on February 5^th.  Within the first 15 minutes of trading it rebounded back up to $20.40. It closed the day up 51 cents at $21.01, with a high of $21.60.

These gap-down-opens were undoubtedly caused by nervous investors reacting to the sharp oil price drop reflected by the pre-opening futures markets (albeit in conjunction with horrible, but expected jobless numbers).

 These ETFs are getting very popular, and so large, that they are having an increasingly large impact on the market.  Reuters reports that USO has increased in size 400% just since early December.

Folks, this is an example of the crazy derivative trading that Warren Buffett warned us about years ago, and of what  brought down the world’s financial system last fall (think CDS – Credit Default Swaps).  But this is our current reality. Obviously, this trade is for sophisticated and/or brave and/or crazy investors. But if you are a good day trader, it could represent an opportunity for quick profits.

Oil ETF (USO-NYSE) Gives Monthly Trading Opportunity – But Jack Be Nimble is a post from: Oil and Gas Investments Bulletin