Think back to the end of April. Natural gas was clearly on its way to zero, at least according to most every article out there. It's hard not to have felt that way given the almost unrelenting decline this market has been in for, quite frankly, years. Well, we had a pretty good rally from that $1.96 bottom to almost $2.75, followed by a pull back and now we have actually broken out above that prior high.
It appears that the nat gas market wants to get back to $3, which for the longest time was the the support line for years. Not much has changed since we last looked at the world from an economic standpoint. We know about the economy, which under the best of descriptions is not doing well. We know that we have more nat gas than we know what to do with.
Nat gas rigs have been shut down across the Gulf of Mexico. Could it be that we are finally at a point where new supply will no longer be expanding at the huge rate it has been? Are markets telling us that $2 is the bottom here? The answer is possibly, "yes", but that does not mean we can’t take another trip down to $2 again to retest the bottom. It might happen if we get another big mess in the overall market.
For nat gas Master Limited Partnerships, what are the implications here? We have the Alerian Natural Gas ETF (MLPG) to see what is happening, and while nat gas has bottomed and then rallied nicely, the nat gas MLP ETF is giving us a different picture.
Now, I don’t want to draw to many conclusions by matching up this MLP ETF with nat gas since we only have six months of trading here to look at. But notice that the nat gas MLP topped out around the time that the price of nat gas hit its $1.96 low. And while the price of nat gas has rallied, this ETF is about to break below its opening price from last November.
If a new bull market in nat gas has begun, I would suggest that buying nat gas MLPs may not necessarily be the way to play it. And it could be possible that some of these companies that have been reflexively hedging themselves against falling prices may have left themselves exposed to rising prices as well. Shorting nat gas has been such a no-brainer for years but if the market has turned, could some companies be caught with their pants down? I guess we might get some indication when the next round of quarterly results start coming out in a few weeks.
Meanwhile, not much has changed in MLP land. The downtrend continues on the overall chart as the 350 on the index appears to be holding, but it is hard to imagine it holding if the overall market begins to unravel. Watch the tape carefully as we move into July.
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