Andrew Burton/Getty ImagesA natural gas line in the Ukraine. Natural gas and its producers may emerge as an attractive trade in the coming weeks.
Investors remain cautious on the broader energy space and for good reason, but an attractive trade in natural gas and its producers may emerge in the coming weeks.
TD Securities analyst Chris Dutton pointed out that natural gas typically sees seasonal strength during the shoulder months of the spring and fall. His work shows that natural gas prices over the past 25 years have the highest probability of positive change in March, April, September and October.
Most importantly, he noted, is that natural gas prices over the past five years have risen every April — the only month to demonstrate such consistency during the current cycle.
“We believe that the seasonal weakness that we experienced this past winter raises the probability of a positive seasonal trade,” Mr. Dutton told clients.
He also highlighted the near-record speculative net short position of 212,000 contracts in natural gas futures as a potential driver of a short-covering rally.
A more fundamental source of support could come from U.S. inventories if they start depleting.
Inventories have been climbing at a rapid pace of more than 50% year over year, similar to what happened in the winter of 2012. Inventories back then peaked the following April, which signalled a low for prices as they reverted back toward their long-term average.
Finally, Mr. Dutton pointed to rising concerns about oil inventory storage as an indirect positive for natural gas.
“This could prompt energy investors to switch exposure toward natural gas from oil,” he said.