Natural gas has gotten a much needed boost over the last couple weeks, rising over 15% after a catastrophic drop in the last year. The rally came in reaction to Chesapeake Energy's (CHK) announcement that it was cutting capital expenditures by more than 2/3's from last year, suggesting lower supplies. In addition, President Obama suggested in his State of the Union address that he'd seek to use more natural gas as a bridge between crude and renewables, suggesting stronger demand.
As econ 101 taught us: less supply + more demand = higher prices. So what's the trade now that the tape has digested these news items and rallied sharply?
Rich Ilczyszyn, founder of iiTrader.com likes natural gas here and suggests the U.S. Natural Gas fund (UNG) as a way for retail investors to play. "UNG is definitely something I'd take a look at here," he says in the attached clip, and offers two bullish catalysts to support the idea:
1. The huge downtrend has been accompanied by massive shorts. When shorts are forced to cover it "scoots the market up," as Ilczyszyn puts it, leading to gains building on gains, particularly when there's a fundamental basis for the move.
2. It's a relatively low-risk trade, in his view.
Those who've been long natural gas over the last few years may take issue here. To be clea, Ilczyszyn isn't saying there isn't danger that the perennial "next big thing" can't continue it's trend lower, just that natural gas isn't going to go to zero, and sees your downside risk that $2.
Ilczyszyn is targeting a move into the $3's and possible as high as $4/btu. As he says, the days of natural gas in the teens may be over but it's not going below $2. In what remains a somewhat dodgy market in the big picture a potential move greater than 30% is nothing to sneeze at.
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