Global Market Comments
March 23, 2023
Fiat Lux
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Trade Alert - (UNG) LEAPS – BUY
(UNG), ($NATGAS), (BOIL)
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Global Market Comments
October 8, 2021
Fiat Lux
Featured Trade:
(OCTOBER 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (TSLA), (BLK), (MS), (JPM), ($NATGAS), (UNG), (BIDU), (MRNA), (COIN), (ROM), ($BTCUSD), (ETHE), (FB), (DAL), (ALK), (LUV) (MSTR), (BLOK), (V), (NVDA), (SLV), (TLT), (TBT)
Global Market Comments
November 13, 2020
Fiat Lux
Featured Trade:
(NOVEMBER 11 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (TSLA), (FB), (AAPL), (ROKU), (UUP), (ITB), (TLT), (TBT), (FXI), (SPY), (BIDU), (TCTZF), ($NATGAS), (DIS) (AMD), (IP), (BIIB), (VRTX)
It looks like I hit the nail on the head once again with a major short position in the United States Natural Gas Fund (UNG).
After my followers bought the July, 2014 $26 puts at $2.16 on Monday, the (UNG) suffered its worst trading day since 2007, the underlying commodity plunging a breathtaking 11%. The puts roared as high as $3.05, a gain of 42% in mere hours. I wish they were all this easy!
If the (UNG) returns to the February low of $22.50 in the near future, you can expect these puts to soar to $5.00. That?s an increase of 130%, and would add 6.53% to our 2014 performance. Please pray for warmer weather, and dance your best weather dance.
It took a perfect storm of technical and fundamental factors to trigger this Armageddon for owners of the troubled CH4 molecule. One of the coldest winters in history produced unprecedented demand for natural gas.
This happened against a backdrop of a long term structural conversion from coal and oil fired electric power plants to gas. Not only is natural gas far cheaper than these traditional carbon based fuels, burning it generates half the carbon dioxide and none of the other toxic pollutants.
The result for traders was one of the boldest short squeezes in history. The incredibly $6.50 Monday opening we saw in natural gas, and the $28 print for the (UNG) was purely the result of distressed margin calls and panic stop loss covering.
At one point, the February natural gas futures, set to expire in just two days, were trading at a 40% premium to the March futures. Extreme anomalies like this are always the father of great trades.
The extent of the industry short position is evident in the cash flows in the underlying exchange traded notes (ETN?s). As prices rose, the long only (UNG) saw $366 million in redemptions, about 36% of its total assets. The Natural Gas Fund (UNL) has lost more than a third of its capital.
On the flip side, the Velocity Shares 3X Inverse Natural Gas Fund (DGAZ) pulled in some $449 million in new investors. Since the rally in natural gas started in November (DGAZ) has cratered from $18 to $2.5. This is why I never recommend 3X leveraged ETF?s.
This all adds currency to my argument that the natural gas revolution is bringing the greatest structural change to the US economy in a century. The industry is evolving so fast that you can expect dislocations and disruptions to continue.
The current infrastructure reflects the state of the market a decade ago and is woefully inadequate, with a severe pipeline shortage evident.? Gas demand is greatest where supplies aren?t. Infrastructure needed to export CH4 abroad is still under construction (see my piece on Chenier Energy (LNG) by clicking here).
The state of North Dakota estimates that it is losing $1 million a day in tax revenue because excess natural gas is being flared at fracking wells for want of transportation precisely when massive short squeezes are occurring in the marketplace. Needless to say, this is all a dream come true for astute and nimble traders, like you.
The question is now what to do about it.
I just called friends around the country, and it appears that a warming trend is in place that could last all the away into March.
It is time to get clever. It would be wise to enter a limit day order to sell your $26 puts right now at the $5.00 price. Since the first visit to these lower numbers usually happens on a big downside spike, the result of stop loss dumping of panic longs accumulated by clueless short term traders this week, you might get lucky and get filled on the first run.
These happen so fast that it will make your head spin, and you won?t be able to type an order in fast enough. If you don?t get filled keep reentering the limit order every day until it does get done, or until we change our strategy.
This has been one of my best trades in years, and it appears that a lot of followers managed to successfully grab the tiger by the tail.
Good for you.
Now We?re Cooking with Gas
Now We?re Cooking With Gas (UNG)
Those who followed my advice to buy the United States Natural Gas Fund (UNG) July, 2014 $23 puts at $1.68 yesterday are now in the enviable position of owning a security that is running away to the upside.
At this morning?s high the puts traded at $2.40, a one day gain of an eye popping 43%. I am getting emails from a lucky few that they got in as low as $1.55 after receiving my Trade Alert.
The question is now what to do about it.
I just called friends around the country, and it appears that a warming trend is in place that could last all the away into mid February. It is starting in Florida and Texas and gradually working its away north, although they are still expecting eight inches of snow in Chicago this weekend.
Mad Day Trader Jim Parker is confirming as much with his proprietary trading model chart, which I have included below. He says that we put in an excellent medium term high in the UNG on Thursday at $27. This morning we tested daily support at $23.26 and it held the first time.
But with warmer weather, this is almost certain to break on a future downside push. Then we train out sites on the 18-day moving average at $22.25. After that, $22.07 is in the cards, the top of the gap that we broke through only as recently as January 27, only four days ago.
There, our United States Natural Gas Fund (UNG) July, 2014 $23 puts, with a present delta of 40% (forget this if you don?t speak Greek), should be worth $2.83. You might get more, if implied volatilities for the puts rise on the downside, which they almost always do.
That would be a one-day profit of 68%, adding $3,000 to the value of our notional $100,000 model trading portfolio, or 3% to our performance this year, which I would be inclined to take.
Now it is time to get clever. It would be wise to enter a limit day order to sell your $23 puts right now at the $2.68 price. Since the first visit to these lower numbers usually happens on a big downside spike, the result of stop loss dumping of panic longs accumulated by clueless short term traders this week, you might get lucky and get filled on the first run. If you don?t, keep reentering the limit order every day until it does get done, or until we change our strategy.
This has been one of my best trades in years, and it appears that a lot of followers managed to successfully grab the tiger by the tail.
If there was ever a time to upgrade to Jim Parker?s Mad Day Trader service, it is now. He will see the breakdowns and the reversals with his models faster than I, and get his Trade Alerts out quicker. Why wait for the middleman, who is me? These fast, technically driven markets are where Jim really earns his pay.
If you want to get a pro rata upgrade from your existing newsletter or Global Trading Dispatch subscription to Mad Hedge Fund Trader PRO, which includes Mad Day Trader, just email Nancy in customer support at nmilne@madhedgefundtrader.com.
Do it quick because she is about to get overwhelmed.
Now We?re Cooking with Gas
Time to Sell Natural Gas
I received a crackly, hard to understand call late last night from one of my old natural gas buddies in the Barnet shale in Texas. Chances are that CH4 peaked in price last night with the expiration of the front month contract. It was time to sell.
I spent five years driving a beat up pick up truck on the tortuous, jarring, washboard roads of this forlorn part of the country, buying up mineral rights from old depleted fields for pennies on the dollar.
The sellers thought I was some moron hippie from California, probably high on some illegal drugs. "You want to redrill these fields and throw dynamite down the holes?" It was a crazy idea. Since I was offering hard cash, they couldn't sign the dotted line fast enough.
During the late nineties nobody had ever heard of fracking. Even in the oil industry only a few specialists were aware of it. My old buddy, Boone Pickens, claims he was doing it in the fifties, but then nothing the wily oilman ever does surprises me.
Only a few reckless independent wildcatters were experimenting with the new process. The oil majors wouldn't touch it with a ten-foot pole. It was unproven, dangerous, and could never deliver sufficient volumes to get them interested. With the deep pockets a trial lawyer could only dream about, they couldn't afford the liability risk of polluting a town's drinking water. So it was left to small fry like me to finance this ground-breaking technology.
I ended up developing a couple of fields, riding gas up from $2 to $5 MMBTU, then selling them off to the gas companies. My partners and I made a fortune.
We have remained in touch over the years. Whenever something indecipherable happens in the international capital markets, they call me for an explanation. When something special sets up in the natural gas market, I get the first call.
On Election Day we all go out and get drunk because their conservative vote cancels out my liberal ones, so why bother? We do this at Billy Bob's in Fort Worth, a favorite of former President George W. Bush, where the 24-ounce chicken fried steaks fall over both sides of your plate.
I didn't reenter the gas market until the Amaranth hedge fund blow up took the price up to $17 in 2006, and then down like a stone. I figured out that the United States Natural Gas Fund (ETF) suffered from a peculiar mathematics that was death for long side investors.
The natural gas futures market often trades in a contango. This is when front month contracts trade at a big premium to far month ones, adjusted for the cost of borrowed money. This premium completely disappears at expiration, when the commercial buyers, like electric power plants and chemical companies, take physical delivery of the gas.
What (UNG) does is buy contracts three months out, run them into expiration, and then roll the money into new contracts another three months out. The premium they pay rapidly falls to zero. Then they repeat the process all over again. It is a perfect wealth destruction machine.
The same dilemma besets futures contracts for oil (USO), corn (CORN), wheat (WEAT), and soybeans (SOYB) to a lesser degree, and a lot of traders make their livings from these anomalies.
What (UNG) does is buy contracts three months out, run them into expiration, and then roll the money into new contracts another three months out. The premium they pay rapidly falls to zero. Then they repeat the process all over again. It is a perfect wealth destruction machine.
I have seen a period when natural gas rose 40%, but the (UNG) dove 40%, thanks to the costly effects of the contango. Needless to say, this makes the (UNG) the world's greatest short vehicle in a falling market. It is a fantastic heads I will, tails you lose security.
There is another crucial factor making natural gas such a great natural short that few outside the industry are aware of. You cannot store natural gas to the degree you can semi liquid oil. Unlike Texas tea, natural gas wells can't be capped without damaging their long-term production. It has to flow and be sold at whatever price you can get. If you don't, it goes away. This means that when the price of natural gas falls, it does so with a turbocharger, also making it an ideal short play.
To make a long story short, I made another fortune riding gas down from $17 to $2. I haven't touched it for 2 years. Other hedge fund manager friends of mine made billions on this trade, and then retired to a sedentary life of philanthropy.
At this point, natural gas is up an unbelievable 56% in three months, thanks to Mother Nature's brutal assault on most of the country, except here in balmy California. Demand is at an all time high, prices a 5-year peak, and speculative long positions in the futures market at an eight-year apex. Storage was taken down to a six month low of 1.2 trillion cubic feet with today's 230 billion cubic foot draw down.
Expiration of the front month contract triggered a super spike in the (United States Natural Gas Fund to an astounding $27, while underling natural gas made it all the way up to $5.50, nearly triple the subterranean $1.90 low set in April, 2012.
This is happening in the face of one of the greatest supply onslaughts in history that will hit the market throughout the rest of this year. They're still hiring and drilling like crazy in North Dakota.
The demand spike came hard and so fast that it caught many suppliers by surprise. That has created a bubble in the pipeline, a temporary shortfall in supplies, and triggered an incredible short squeeze in the natural gas market.
Winter can't last forever. Eventually summer comes, and the shortage of natural gas pipeline will get more than made up by thousands of new fracking wells in the US.
If the UNG returns to the November, 2013 $17 low by July 18, the value of the (UNG) July, 2014 $23 put rises from our $1.68 cost to $4.72, a potential gain of 181%. That's a fabulous risk/reward ratio, and we have six months to see it happen.
Keep in mind that liquidity could be an issue here. Yesterday, 1,549 contracts traded against on open interest of 2,297 contracts. The option market spreads here are also humongously wide and the volatility is of biblical proportions, which is endemic to the natural gas market.
Just to get a second opinion, I called Mad Day Trader Jim Parker, as I hadn't been in this market for a while. He said it was warming up in Chicago, and he was venturing outside for a walk for the first time in three days. Out went the Trade Alert!
Below please find a chart for natural gas generated by Jim?s proprietary trading model. The bottom line here is that there is a high probability that we will drop from the current $5.17 down to $4.70, break that, go down to $4.17, break that, and possibly go as low at the November low of $3.40.
They don?t call this market the ?widow maker? for nothing, so expect a lot of heart wrenching volatility before you see a substantial payoff. So it best to enter a spread of small limit orders and hope for the best.
You can best play the short side through the futures market in natural gas. For those without a futures account, you can buy the 2X ProShares Ultra Short DJ-UBS Natural Gas inverse ETF (KOLD) or the 3x Direxion Daily Natural Gas Related Bear 3X Shares inverse ETF (GASX). The more adventurous can sell short the (UNG) outright, if they can find stock to borrow.
Time to Sell Winter Short
Billy Bob?s in Forth Worth
I think that oil peaked last week with the Egyptian Army?s ferocious and bloody attack on the Muslim Brotherhood. I hate to sound cynical here, but count the daily bodies in the street, which has been trending down sharply since Thursday?s, 1,000 plus tally. Fewer bodies mean lower oil prices.
This has most likely broken the back of the fundamentalist opposition movement for at least the time being, which has accounted for the $20 spike in oil prices over the last two months.
This returns us to the longer term fundamental trend for oil, which is sideways at best, and down at worst. The US is flooding the world?s oil markets with energy in all its many forms. The driver here is American fracking technology, which will continue to upend the traditional energy markets for decades to come. It?s just a matter of time before fracking goes mainstream in Europe, especially in the big coal countries of Germany, Poland, and England. Then they can thumb their noses at Russia, a major gas supplier over the last thirty years. China will follow.
In a crucial news item that wasn?t reported nationally, the California legislature voted down a measure to ban hydraulic fracturing in their state. It was defeated in a democratically controlled body. As the Golden State is the most anti energy state in the country, this gives the state a flashing green light to move forward against environmentalist opposition. There is a ton more of new supply coming. This is what the weakness in the price of natural gas is telling you (UNG).
We also received a new negative for oil this month, the collapse of the emerging market currencies, stock markets, and bonds, especially the Indian rupee. This reduces their international purchasing power in US dollar terms, thus raising the cost of oil in local currency terms. You see, oil is priced in dollars. As the emerging markets have seen the largest growth in demand for oil in recent years, this can only be bad for prices.
In terms of my own trading portfolio, I want to have a ?RISK OFF? position, like an oil short, to hedge my two existing ?RISK ON? positions in the Euro (FXE) and the yen (FXY) shorts. US stock markets could be weak into September, and they will take oil down with them.
The energy inventory figures released on Wednesday were another tell. Oil came in line with a 1.5 million barrel weekly draw down. But gasoline showed a precipitous 4 million barrel drop in supplies, meaning that more people are driving to their summer vacations than expected. Texas tea should have rallied at least $1 on the news. Instead it fell $1.50. It is an old trading nostrum that if a contract can?t rally on surprisingly positive developments, you sell the daylights out of it.
Below, you will find another chart that you should wake up and take notice of, the Powershares DB US Dollar Bullish Index Fund (UUP). Commodities traditionally are weak when the dollar is strong. Both the chart and the fundamentals suggest that we are close to a multiyear low for the greenback and are about to enter a prolonged period of dollar strength. This is also grim tidings for oil.
Finally, there is that last resort, the charts. Check out those for the (USO) and oil and it very much looks like we have a triple top in place. That is the straw that breaks the camel?s back. Time to sell.
The only way I am wrong on my oil call is if the Chinese economy is about to take off like a rocket. They are the marginal big swing player in this market. But there is absolutely no sign of that happening in the economic data. If anything, the collapse in emerging markets suggest that conditions in the Middle Kingdom are about to get worse before they get better.
Ouch! That Hurt!
I recently spent an evening with Ambassador Richard Jones, the Deputy Executive Director of the International Energy Agency in Paris, who had some eye opening things to say about the energy space. The IEA was first set up as a counterweight to OPEC during the oil crisis in 1974, and has since evolved into a top-drawer energy research organization.
World GDP will grow an average 3.1%/year through 2030, driving oil demand from the current 84 million barrels/day to 103 million b/d. That means we will have to find the equivalent of six Saudi Arabia?s to fill the gap or prices are going up, possibly a lot. His conservative target has crude at $190 in twenty years. Some 39% of that increase in demand will come from China and 15% from India.
A collapse in investment caused by the financial crisis means that supply can?t recover in time to avoid another price spike. More than 1.5 billion people today don?t have electricity at all, but would love to have it. The best the climate negotiations can hope for is for CO2 to rise until 2020, and then plateau after that, because once this greenhouse gas enters the atmosphere it is very hard to get out.
This will require a massive decarbonization effort reliant on nuclear, hydro, alternatives, and carbon capture and storage. Up to half of the needed carbon reduction can be achieved through simple efficiency measures, like ditching the incandescent light bulb, driving more hybrids, and closing dirty, old coal fired power plants. Natural gas will be a vital bridge, as it is cheap, in abundant supply, and emits only half the carbon of traditional fossil fuels. The total 20-year bill for the rebuilding of our new energy infrastructure will exceed $10 trillion.
Richard, who comes from a long diplomatic career in Kuwait, Kazakhstan, and Israel, certainly didn?t pull any punches. I have been a huge fan of the IEA?s data for 35 years. Better use any weakness in oil prices to accumulate long term positions in crude through the futures, the ETF (USO), the offshore drilling companies like Transocean (RIG), and oil and gas plays like ExxonMobil (XOM)? and Occidental Petroleum (OXY). When oil comes back, it will do so with a vengeance.
I?ll Take Another Six Please
American oil imports from the Middle East are in free fall, down 35% in two years. They are quickly being replaced by tar sands imports from Canada, which are ballooning to 2 million barrels a day and at all time highs. American energy production is surging, thanks to new finds of natural gas showing up in everyone?s back yard, taking the country rapidly on its way to energy independence.
So why is the price of oil so damn high?
Everywhere you go to seek a shortage, you find a glut. Storage facilities at the Cushing, Oklahoma hub are practically overflowing. The Strategic Petroleum Reserve is close to its 727 million barrel maximum capacity, or 36 days of national consumption.
Traditionally, the beginning of the summer driving season heralded higher crude prices. But gasoline consumption has been sliding for five years, thanks to the widespread adoption of hybrids and electric cars, and the improved mileage of conventional automobiles.
Even the Iranian election results auger poorly for the price of oil. The win by moderate Hassan Rohani, who boasts a doctorate from a Scottish university, promises to ease tensions with the United States over the nuclear issue.
More mysterious is the fact that the price of oil has been levitating in the face of the utter collapse of virtually every other commodity. Dr. Copper is handing out ?F?s? these days, the red metal down 30% this year. Iron ore is close to 50% down from its peak, to the deep distress of many Australians and their beleaguered dollar. Even the barbarous relic is off, gold falling 31% from its high. How come the Chinese economic slowdown is dragging down the price of everything except the one it needs the most?
The US decision to send weapons to Syria is, no doubt, positive for oil prices, but it is only worth a bump for a day. America has also announced joint military maneuvers with Jordan. How much do you want to bet that they accidentally leave their weapons behind?
Iran responded by sending 4,000 troops into the battered country to join Hezbollah from Lebanon, who are already there. Syria is turning into the Spanish Civil War of our age. But as it produces no oil, it shouldn?t materially impact prices.
Looking at speculative long positions held by hedge funds, I find them at multiyear highs. My guess is that investment demand, not consumption, accounts for up to $30 of the current $98 price of black gold.
Maybe we should just write all this off to another instance of prices moving the opposite direction of fundamentals, which has become so common this year. Or perhaps President Obama is right? Is it the work of evil speculators?
