The Chart that Makes Investors Cry

Keith Kohl

Written By Keith Kohl

Posted January 26, 2011

I should warn you now that the chart I’m going to show you today might bring you to tears…

Over the last three years, I’ve seen even the most seasoned investor break down with pangs of regret.

And when the last nose is blown, the tears wiped away, they come out the other end with fear.

That fear has developed into anger and spite. It clouds their minds and stays their trading hands.

Personally, I feel great when they tell me that the natural gas market is dead. Because when I see that fear take grip, there’s an opportunity for my readers to make a small fortune…

Natural gas markets: dead or alive?

It’s no secret natural gas prices have been flat.

For some investors — particularly those in a certain ETF that I’ll be mentioning in a bit — looking at a chart of natural gas prices is downright depressing…

nat gas prices 1-26-11

Unlike oil, which is once again threatening $100 per barrel, natural gas prices have been the step-child left out in the cold, repeatedly forced to scrub the basement floors.

Natural gas wasn’t the belle of the ball in 2010. Take a closer look, and you’ll see why…

To begin with, demand is lackluster. As you can see from EIA data, over 60% of natural gas consumption stems from just two areas: electric power and industrial demand.

Breaking it down further, you’ll notice electric demand is at record levels. Industrial demand, however, is severely lacking.

Meanwhile, domestic production is on the rise.

As you know, that boost is thanks to the shale explosion over the last decade. Shale fever won’t abate, not even during a supply glut.

You can see below that we’re currently drilling more natural gas wells than ever before:

nat gas producing wells

It’s the reason Exxon entered the shale arena after purchasing XTO Energy in 2009…

It’s why China went on a buying spree in the United States, and launched their first shale gas research center about seven months ago…

It’s why Reliance Industries, India’s largest conglomerate, shelled out $1.3 billion for a 45% stake in Pioneer Resources, and is working with other shale players (Atlas Energy and Carrizo Oil and Gas immediately come to mind) to develop joint projects…

When the glut begins to ease by next year, the sky’s the limit.

Not all stocks were created equal

Here it is, dear reader… the chart that has made investors cry:

UNG price chart

Time and again, they’ve whispered in our ears, “This is the bottom.”

Believe me, UNG investors have incorporated that mantra into their nightly prayers, hoping for intervention from a higher power.

And still the stock fell.


When prices of natty gas fell below $4/Mcf, they ran for the hills. And I hope they made it, because natural gas markets will get very interesting going forward.

This is not some magic formula… In fact it’s beyond me how they got trapped in the first place.

The problem is right in their profile summary:

The investment seeks to replicate the performance, net of expenses, of natural gas. The trust will invest in futures contracts on natural gas traded on the NYMEX that is the near month contract to expire. It is non-diversified.

The shale explosion over the last several years has directly affected the supply-side balance. Couple that with lackluster demand, and you have to wonder how they didn’t see it coming.

Were they really expecting to see $15/Mcf during a supply glut?

And even though natty gas prices are locked in the basement, these shale players are still performing for their shareholders.

Here’s a glimpse of that opportunity:

UNG vs. Shale stocks

Make no mistake — there’s a war breaking out over hydraulic fracturing, one of the critical factors in producing oil and gas from a shale deposit.

However, those shale deposits are too valuable to leave untapped. You can fully expect companies to meet the challenge.

Here’s a perfect example.

This company’s revolutionary petro-fracking technique could be the answer these drillers are looking for.

Until next time,

keith kohl

Keith Kohl
Editor, Energy and Capital

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