Looking at a weekly chart, you can see that natural gas pushed higher out of an inverse head-and-shoulders pattern early this year. It then spent February and March consolidating its gains, and now it looks ready to head higher again. My target is its old highs.

Seasonally, this is about the time that natural gas usually dips as temperatures go up and heating demand goes down. But that may not happen this year. Here are some fundamental reasons why…

Natural gas consumption in the U.S. increased 6% last year. (Oil consumption was flat.) Going forward, natural gas consumption should rise between 2% and 6% per year.

Production of natural gas in the U.S. is flat, and imports are down because natural gas suppliers can sometimes get better prices in Europe and China.

Natural gas prices did pull back on Thursday, thanks to the most recent report from the Energy Information Administration. That showed a build in natural gas stockpiles of 27 billion cubic feet. On the other hand, it was the first build in 21 weeks. What’s more, stockpiles are still 298 billion cubic feet less than last year at this time and below the five-year average.

You can play natural gas with one of the natural gas ETFs, or with an undervalued natural gas producer. Or, you can go for the leverage of futures and futures options on natural gas. Be sure that any trade fits your risk profile, and run ideas past your investment advisor.

Good luck and good trades,

Black Bear

Check out a chart showing the Q1 2008 action in the CRB Index, a widely tracked basket of 19 leading commodities, versus the S&P 500 from the beginning of the first quarter through Tuesday. The CRB Index is up 11% during that time frame. Meanwhile, the S&P is down over 7%. OUCH! Which would you rather invest in?

Investors are asking themselves this question and voting with their funds. According to a report just released by Citigroup, global investments in commodities rose by more than 20% in the first quarter to $400 billion, helping boost prices as investors sought protection against inflation and a weaker dollar.

The report says that investments in commodity indexes rose $40 billion in the first three months of the year to $185 billion, a larger gain than the whole of 2007.

A “tidal wave of investment flows into commodity markets has further boosted prices,” the Citigroup analysts said, quoted by Bloomberg News. “The weakening U.S. dollar has been the main macro force attracting funds to commodity markets. Other contributors are falling real interest rates and inflation worries.”

How do we square the strong rallies we’re seeing in oil, gold, grains and basic materials with forecasts some are making for a global recession? Answer: Somebody is obviously wrong. You can’t have demand and prices soaring at the same time that a global recession is taking place. Our solution is to follow the money — and bet on commodities. We think the next tidal wave of wealth pouring into commodities could be a real doozy.

Yours for trading profits,

Black Bear
The Secret Order of Jurojin

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