The seven -year low of natural gas prices is the opportunity of a lifetime! The decline has been attributed to several incidences: 1. A significant decrease in demand from the industrial sector, 2. Increase output from a combination of oversees production, and 3. Increase in unconventional gas from shale deposits in Texas and Lousiana. That said, it's no wonder why natural gas has fallen below the price of $4 last month.
Nevertheless, the outlook of natural gas is quite promising. According to the Energy Information Administration (EIA), the consumption of natural gas for 2009 is expected to fall to approximately 1.4% and rise about .6% in 2010. Moreover, Henry Hub spot prices, which averaged $4.65 per thousand cubic feet (Mcf) in February, are expected to average $4.67 per Mcf in 2009 and $5.87 in 2010. Over the long term, the EIA expects Henry Hub spot prices (in 2007 dollars) to reach $9.25 per Mcf in 2030. Additionally, other factors which can potentially increase the prices upward include, natural disruptions of natural gas such as severe storms (hurricanes), and a surge in demand from industrials as a result of a faster than expected recovery of the US economy.
While renewable energy companies are expected to represent a larger portion of the U.S. energy portfolio over the next two decades, natural gas along with coal and oil, the three natural resources are still expected to meet 79% of U.S. energy supply needs, down from 85% in 2007. Clean energy from renewable sources like the wind, sun and ocean waves, while promising, are likely to take several years before they reach a critical mass. An alternative for investors to consider is natural gas. Yes, natural gas is a fossil fuel, but it does offer the advantage of having a cleaner reputation than oil.
For those who are considering a stake in natural energy, examine closely the following ETFs:
1. The US Natural Gas Fund (UNG). Investors who desire to track the performance of natural gas in percentage terms, UNG is appropriate. For example, when the natural gas April 2009 futures contract recorded a 13.74% increase at 5:14 p.m. on March 19, the UNG ETF followed suit, closing up 13.33% for the day.
The ETF is roughly about .40 cents above the 52-week low of 14.10. The ratio of puts to calls coupled with an accelerating volume suggest that the May strike 15 calls might depreciate rapidly in premium; this gesture is great for option writers! To that end, one can buy the underlying shares and write the May Strike 15 calls at approximately .90/contract.
2. The First Trust ISE-Revere Natural Gas ETF (FCG) is suited for investors who wish to invest in an ETF tied closely with stocks. The largest holdings in FCG include Quicksilver Resources (KWK), Linn Energy (Line) and Petrohawk Energy (HK).
FCG's May strike 10 or 11 offer the same intrinsic time value, depending how conservative an investor wishes to be. For those who want the possibility of pocketing the intrinsic value in hope of having the underlying shares getting called away by option expiration, strike 10 is a better alternative. Conversely, if you desire to establish a holding position with a greater chance of holding the underlying shares past option expiration, the May strike 11 is better.
Disclosure: Author does not own any securities pertaining to the above mentioned companies.
Nevertheless, the outlook of natural gas is quite promising. According to the Energy Information Administration (EIA), the consumption of natural gas for 2009 is expected to fall to approximately 1.4% and rise about .6% in 2010. Moreover, Henry Hub spot prices, which averaged $4.65 per thousand cubic feet (Mcf) in February, are expected to average $4.67 per Mcf in 2009 and $5.87 in 2010. Over the long term, the EIA expects Henry Hub spot prices (in 2007 dollars) to reach $9.25 per Mcf in 2030. Additionally, other factors which can potentially increase the prices upward include, natural disruptions of natural gas such as severe storms (hurricanes), and a surge in demand from industrials as a result of a faster than expected recovery of the US economy.
While renewable energy companies are expected to represent a larger portion of the U.S. energy portfolio over the next two decades, natural gas along with coal and oil, the three natural resources are still expected to meet 79% of U.S. energy supply needs, down from 85% in 2007. Clean energy from renewable sources like the wind, sun and ocean waves, while promising, are likely to take several years before they reach a critical mass. An alternative for investors to consider is natural gas. Yes, natural gas is a fossil fuel, but it does offer the advantage of having a cleaner reputation than oil.
For those who are considering a stake in natural energy, examine closely the following ETFs:
1. The US Natural Gas Fund (UNG). Investors who desire to track the performance of natural gas in percentage terms, UNG is appropriate. For example, when the natural gas April 2009 futures contract recorded a 13.74% increase at 5:14 p.m. on March 19, the UNG ETF followed suit, closing up 13.33% for the day.
The ETF is roughly about .40 cents above the 52-week low of 14.10. The ratio of puts to calls coupled with an accelerating volume suggest that the May strike 15 calls might depreciate rapidly in premium; this gesture is great for option writers! To that end, one can buy the underlying shares and write the May Strike 15 calls at approximately .90/contract.
2. The First Trust ISE-Revere Natural Gas ETF (FCG) is suited for investors who wish to invest in an ETF tied closely with stocks. The largest holdings in FCG include Quicksilver Resources (KWK), Linn Energy (Line) and Petrohawk Energy (HK).
FCG's May strike 10 or 11 offer the same intrinsic time value, depending how conservative an investor wishes to be. For those who want the possibility of pocketing the intrinsic value in hope of having the underlying shares getting called away by option expiration, strike 10 is a better alternative. Conversely, if you desire to establish a holding position with a greater chance of holding the underlying shares past option expiration, the May strike 11 is better.
Disclosure: Author does not own any securities pertaining to the above mentioned companies.
About the Author:
Dr. Jack Haddad, MD, MBA has been professionally trading the stock market since 1997 and had an annualized return of 39.4%. Dr. Haddad has recently launched MD Capital Management, an Investment Fund with Charles Schwab. The fund utilizes option hedging techniques to generate returns while minimizing risks. For more info, visit Jack's online group: MD Capital Management.
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