Time To Buy Natural Gas As Short Position May Be Ready To Unwind

We’ve begun buying United States Natural Gas ETF (UNG) here in the 29-30 range as we believe it is likely that the sizeable short position in natural gas will begin to unwind very soon. Natural gas has just filled a significant gap at $6.50 dating back to September 2007, and the commodity has been completely left for dead after hedge funds were violently liquidated out of their early-mid 2008 momentum trade. After 3 months of heavy liquidation, and a precipitous decline to the downside, it is likely that liquidation and margin call selling are now complete and what we have left is a significant short position ready to cover. The risk/reward profile is excellent at these levels with about 3 points downside to +10 points upside.

Moreover, keep in mind that due to the recent decline in natural gas prices, major producers like Chesapeake Energy (CHK) have pared back major natural gas projects which should lead to a decline in future natural gas supply estimates which should be marginally bullish for natural gas prices in the future.

Lastly, we are also entering the winter season where demand for natural gas tends to perk up due to home heating. Are we expecting natural gas prices to spike back to the $13 level overnight? No, but we like the ingredients here for a nice 30% short squeeze to the $8-9 level which should put UNG at around $40.

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