Monday, 25 June 2012

Natural Gas: Get Ready to Burn!

Falling Knife

Natural Gas has been falling a lot over the last few years. Since 2008 it's price fell from over 18 to a low of just over 2 (a drop of nearly 90%). In that time it fell relentlessly continually breaking it's 100 day low without a single 100 day high being broken:

An almost perfect downtrend.

A Flicker of Hope

Recently the price has stabilised and a possible reversal may be on the cards for the future.

The chart below shows it's recent price action and the 100 day line plotted into the future. A break of the 100 day high line could indicate the beginning of an uptrend:

At present the 100 day high is just below 3 which will fall to around 2.8 in mid July if it isn't broken before then. This represents a potential entry point as an indication of a change in the trend. Certainly investing at these levels carries less downside risk as a lot of falls have already taken place but we must wait for confirmation in the form of a 100 day upside break. If you enter without this then there is added risk the price will continue falling. From a peak of 18 many investors might have thought it looked cheap at 9 and 50% off its peak and invested. At 6 and 4 and 3 they would have also thought it was cheap and bought more. They would be sitting on big losses now so it's important to wait for some price action to indicate a reversal might be happening.

Price Target

To set the price target we will use the same process outlined in commodity valuations. This gives us the following price target based on a reversion to the 8 year average price:

A price target of 10.2 within the next ten years gives a minimum annualised return of 13% if investing at 3 and 13.8% if investing at 2.8.


Pretty hefty returns. Of course Natural Gas isn't ready to go yet. We still need to wait for a break of the 100 day high. Also remember commodities are very volatile and should not make up a large proportion of our total portfolio. Having said that this looks like it could be one of the best commodity investing opportunities we have seen for a long time.

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