Natural Gas

I posted this on google finance:

The investment objective of UNG is for the changes in percentage terms
of the unit's net asset value to reflect the changes in percentage
terms of the price of natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the price of the futures
contract on natural gas traded on the New York Mercantile Exchange
that is the near month contract to expire, except when the near month
contract is within two weeks of expiration, in which case it will be
measured by the futures contract that is the next month contract to
expire, less UNG's expenses.

I don't know of a better proxy for conveniently owning the commodity
itself... but of course that may just be an expression of my
ignorance.  UNG is a better proxy for natural gas itself than any of
the producing companies are, as it much more directly tracks the spot
price of natural gas, while producing companies have complicating
factors.   You can trade UNG in much smaller quantities than futures
contracts themselves, and you don't have to worry about rolling it
over. There are going to be differences between UNG and the spot price
based on the way the futures markets work  as well as the markets
where UNG trades, but the partnership (and others) uses fowards and
swaps to arbitrage.   UNG is not priced in units of MMBtu, but in
units of UNG partnership shares, so don't expect the price of UNG to
be the same as the spot price of 1 MMBtu of natural gas.     At
present the ratio is about 3.917, but this changes over time.
Arbitrage occurs when the value of UNG's actual amount of natural gas
futures contracts holdings gets too far out of line with the value of
the UNG partnership.

Beware of the tax implications:  you will be a "partner" and get a
Schedule K-1 form.  This isn't really a big deal, but it may
complicate your taxes slightly.   Most of the income is qualifying.

Natural gas tends to be low while supply and output are high, and
while demand is low, and these factors are in play presently.  You can
keep tabs on the weekly report of natural gas at
http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html
and especially on storage at http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html

Natural gas is selling below cost.  But not below the running costs of
operational wells, just below the total long term costs of
production.   Most of the costs of natural gas are up front:
exploration, resource development, drilling, building out the
infrastructure, etc.  Once that happens, these costs are already
sunk.  If the price of natural gas falls, as it has, it is too late
for producers to change their mind and not build the well.   Many
producers will continue to supply because their business models
require the cash flow.   Do they end up with a loss?  Yes, but sadly
they are pretty much locked in.   Those that can will shut in the
wells and wait for better prices   It's also a bit of a game of
chicken... you want the *other* guy to shut in their wells, while you
take advantage of the bump in prices they create.  It will take time
for well output to diminish and for producers to shut down, before
output and supply fall appreciably.   Hopefully natural gas usage will
increase, but outside of utilities and manufacturing that is suitable
for natural gas, that is a long shot.

Natural gas has a strong cyclical component.   I'm more familiar with
other commodities.  I can't comment in detail about how output is
increased/decreased across the seasons, but obviously it is.   It
seems that such throttling by the industry could prevent oversupply to
keep the prices up, but what is best for the whole is often out of
line with what is best for the individual producer, and that's where
game theory comes in, and that's where this stuff gets really fun (as
an investor, I'm sure the producers hate it).   Without knowledge of
the details I can't comment much on the seasonal dynamics.

Will it go up in the long run?  Yes.  But it may not be as quickly as
you hope.   I expect prices to remain low, or to rise modestly over a
long period.

I added:

Actually I'm very bullish, even if my post sounds even handed.

While it may take time for natural gas prices to recover, there is a
very high probability that they will, and by a very large amount
(double or triple).   A high-probability double in say 18 months is a
very very good trade.

I could also add a few more things:

Every Thursday at 10:30 Eastern time, the storage report is released. The price jumps up or down based on a resyncing of expectations to reality.
LNG may impinge on the Natural Gas market, placing a ceiling on Henry hub prices. But shipping costs and the costs of cleaning and compression put a floor on how low LNG can go. And when natural gas is cheaper than that (and I think it is), LNG is not inhibiting the ability for natural gas prices to rise.