Is Natural Gas Bottoming?

2011-5-26

Natural gas has been hard hit in recent years, but the primary natural gas ETF and several leading stocks are showing signs of a bottom, offering favorable long entries with controlled risk.

From the 2008 high of $13.61, natural gas futures plunged to a low of $2.50 just 14 months later. Over the past two years, the ranges have narrowed but have stayed near historically low levels.

Estimates indicate that the current amount of natural gas available for production would be enough to last 100 years under current domestic consumption. With natural gas so cheap, about 40% of natural gas production is sold for less than it costs to produce.

The prolonged price slump has caused many companies to concentrate on drilling for oil instead of gas because the profit margins are much more attractive for oil. It is possible that decreasing natural gas supply will be met by increasing demand.

As I noted in early May, the weekly volume analysis on the United States Natural Gas Fund (UNG) indicated that an intermediate-term bottom was forming. Also, several of the larger natural gas companies have now corrected to strong support.

Natural gas was in the news on Tuesday, as El Paso Corporation (EP) was up 7% for the day on very heavy volume after it announced that it will split into two companies.

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