After almost 30 days of trading almost straight down, natural gas rallied up 30% this week – could this be the REAL rally investors have been hoping for, or is it another headfake?

Unfortunately, I believe that the type of big moves we saw in natural gas price this week is indicative of bear market short covering rallies more than anything.    The October 2009 contract for natural gas in the US was US$2.51/mcf last Friday, and today (Fri Sept 11) it closed at $3.25/mcf.  Canadian natural gas (Sept contract) priced at AECO jumped from CAD$2.25 – $3/mcf from last Friday to today.

And several natural gas several stocks had great runs. As equities do, they started pricing in this week’s run in natural gas a few days early – last Friday. Vero Energy* (VRO-TSX), which has more analysts covering it than any other junior gas producer on the TSX, jumped from $3 – $4.43 this week before settling at $4.04.  (It has the best jumps on the bear rallies!)

Many other gas stocks were up 20-30%, including the debt-free natural gas producer that I alerted my subscribers to in my most recent issue.

Even when natural gas prices dropped hard today, Friday, many producers continued to rally.

I expected this kind of sharp rally in my Aug 17 article – “I see that many, many investors are willing to jump in hard and fast into beaten down natural gas stocks with any good news.  I think a lot of stocks will have big moves in 1 or 2 days if and when a positive injection (i.e. low) number comes in, but the real question is – is that that time to be a buyer, or a seller?”

The good news for the bulls is that natural gas supply is dropping.  Canada is producing more than 1 bcf/d LESS than last year, due to natural well declines and a reduced rig count.  There are also reports that many producers are now shutting in even more wells.

The bad news is that it isn’t making much difference – yet.  This week’s 65 bcf injection was not a positive sign.  Yes it was less than expected, but still too much to prevent full storage and industry wide gas shut-ins before the end of October.

James Williams of WTRG Economics says that weekly natural gas injections over the next two months need only average 24.3 Bcf / week to match the 2007 record. Over the last 5 years, even with the negative impact of several major hurricanes, injections averaged 61. (His weekly oil and gas updates are great and only US$79/yr – www.wtrg.com).

Other points for the bears include:

-no increase in industrial demand in the US for natural gas.  When I look at the weekly oil reports, in the distillates section, which is energy-speak for heating oil and diesel, I see stockpiles are high and rising. 

– 3 new LNG import terminals in the US, and one in Canada, this year.  And liquid natural gas is being imported for less than US$4/mcf. 

-for Canadian gas producers – a rising Canadian dollar,  squeezing cash flows even more. 

For all that however, the stocks don’t lie.  And the AMEX Natural Gas Index is in a clear uptrend.  So for investors, our time is getting close.  I just think these stock will come back – especially the Canadian ones, which all have a lot of debt.

That makes it difficult for me to invest in many of my favourite junior and intermediate producers.  The banks who are owed that debt lent it out under very different circumstances – everyone saw the gas price staying high and the Canadian income trusts buying them out.  Now everyone sees the gas price staying low and the banks want their money back.  So any increase in cash flow will go towards lowering debt, not growing the company (or its stock price).

And to top it all off, Canadian securities firm National Bank said in a September 10 report said that gas stocks were pricing in a Canadian natural gas price of CAD$4.65 already.

On the positive side, back in 2001 when gas was this low, equities priced in a rise in prices some 6 months in advance.  If you look at the AMEX Natural Gas Index, it is clearly in an uptrend.  So maybe that was the bottom.  Certainly the chart on the TSX listed natural gas ETF, GAS, indicates a capitulation bottom last week.

But I’ve said that before.  And investors were wrong in June of this year when the US natural gas ETF received so much volume on hopes of a recovery—only to be disappointed.

I gave subscribers three natural gas weighted producers to start watching—and they did well this week.  But for myself, I am still waiting to be a buyer.