There is an easy way to find out where the market thinks a particular sector is heading: Check out the movement of futures contracts held by top hedge fund managers.
These days the signal is clear and pointing in one direction. It's in energy.
Reports have recently surfaced that hedge funds are moving into commodities in general, and energy commodities in particular. What's more these moves are more bullish than at any time since midsummer.
The reason is the same one that we have been discussing for several months. Demand is coming back more quickly than anticipated.
Energy spikes usually start that way. Indicators of market resurgence seem to rush onto the scene, catch analysts by surprise, and the acceleration begins.
But this time, those who survey the market should have seen it coming. After all, the indicators and benchmarks have been there. I have been laying them out here in Money Morning for weeks.
Two elements have emerged over the past several days that finally require the pundits to catch up with us.
First, it is becoming impossible to ignore what is happening in the U.S. and China. Both markets are moving up, with that direction intensifying of late.
In the U.S., forward economic indicators are developing into a bull market signal. This has augmented the run we have experienced of late, largely due to the combination of an oversold condition, no bad news (Congress and the White House may at last be learning how to play nice in the sandbox), and money moving back in.
But it's the second factor that everybody will be talking about this week.
Betting on the Coming Boom in Natural Gas Prices
As I write this from Pittsburgh, the temperature has reached the single digits. This is not a big deal for some of you elsewhere - like the Plains States or New England - but it does serve as a reminder of what season this actually is.
There is also something else happening this morning.
Natural gas prices are moving up.
There is still some way to go before these natural gas reached the $4 plus level (still the perceived breakeven point for a number of producers). Still, after testing the low $3 range earlier in the month, the temperatures in the East are certainly bringing gas back into perspective.
Natural gas usage remains sensitive to temperatures and weather conditions during the winter. Last year's unusually warm temperatures depressed gas prices more than usual.
That was because the amount of gas extractions was much above anticipated levels. The combination of lower demand and higher supply translated into a downward price pressures.
But we are in a different environment for gas production than we were a few years ago.
Until 2005, the assumption was that the U.S. would need to import more liquefied natural gas (LNG) to compensate for accelerating declines in conventional domestic production.
LNG overcomes the primary problem faced by natural gas users. Available supply is traditionally limited to where pipelines are running. LNG, on the other hand, cools gas to a liquid, allowing it to be transported by tankers almost anywhere by water, regasified at an import terminal, and then injected into the local pipeline network.
By the middle of last decade, estimates of how much domestic gas need would have to be imported via LNG were as much as 15% and as soon as 2020.
But the ability to exploit unconventional deposits (shale and tight gas, coal bed methane) has dramatically changed the equation.
2013 Natural Gas Prices: Now is the Time To Be Bullish
Forget the Farmer's Almanac.
As we move into the winter season, two things are becoming clear. First, this one will be colder than last year, nationwide. Second, natural gas prices are moving up.
A colder season ahead is an almost statistical certainty. The likelihood of having a repeat of last year's mild winter is quite low. And my second assertion is now supported by several factors.
Until very recently, the changing of seasons was a determining factor in gas prices.
The warm winter throughout much of the U.S. last year certainly contributed to the dive that saw gas prices plummet to near $2 per 1,000 cubic feet (or million BTUs), the NYMEX futures contract unit.
The bigger issue, however, has been the game-changing entrance of unconventional natural gas supply in North America. Both the surplus of in-market stored gas and the ready availability of expanding reserves have been driving factors in lowering prices.
The amount of available gas is staggering.
Known reserves of shale and tight gas, coal bed methane, and remaining free standing volume now allow up to a 25% increase in supply per year into the foreseeable future.
Now, nobody would actually drill that much, because they would destroy the market (the classic example of "drilling" oneself in the foot).
But the ready availability was restraining pricing. That resulted in a period in which gas rig utilization has fallen each month - to its lowest level in over a decade. The industry has been slowing the introduction of accelerating volume into what had been an oversaturated market.
The hottest summer on record also contributed to a steady improvement in price. As the power-generating sector moves quickly toward low-priced gas as the fuel of choice, rising temperatures also increase the need for gas.
But now, at last, the balance is forming.
The inventory is now the smallest in the last two years, as demand picks up in petrochemicals, industrial usage, and even vehicle fuel prospects.
The major thrust is beginning.
This will not be a straight line for natural gas prices. Volatility cuts in both directions.
But one thing is clear.
The gas market is about to get a whole lot stronger...
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How a Crude Oil Prices Slump Could Bury these Countries
Natural Gas: Following T. Boone Pickens into the Energy Patch
An iconic Southwestern energy patch player, T. Boone Pickens has built a legacy over the decades that proves the old Texas saying: "It's not the size of the dog in the fight, but the size of the fight in the dog."
In the wild days of the 1980s, made famous by a generation of traders who emulated the likes of Gordon Gekko, few could ever match the Pickens eye for the big deal.
Never eat anything bigger than your head?.... Pickens never heard that one.
As the head of Mesa Energy, his first deal was to purchase the Hugoton Production Company - made notable by the fact the company was 30 times the size of his own.
His thirst for Goliaths continued for decades to come. He once even went after Gulf Oil, which is now Exxon Mobil.
The point is Pickens has never shied away from risk when he saw reward. And for all his bold achievements there is always less "crazy" there than there seems to be.
And if you're looking for a guy who knows:
- How Wall Street traders and Texas wildcatters think.
- Who can read a geological map.
- Who can manage a hedge fund.
- And who can make money in a volatile industry... Pickens is your guy.
That's why there is more there than meets the eye in his unique venture into the natural gas market with Clean Energy Fuels Corp. (Nasdaq: CLNE). Pickens is its founder and largest individual shareholder.
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The Natural Gas Budget Shortfall
Natural Gas Reality Check: President Obama Got This One Right
In the past two weeks, a maelstrom of emails has been hitting my inbox from concerned readers, investors, academics, and even some prominent journalists.
What's got everyone so heated?
It seems a lot of people are concerned, confused, and even outraged over a recent Executive Order signed by President Barack Obama regarding the development of unconventional natural gas formations here in the United States.
The executive order, issued on April 13, calls for greater coordination in federal oversight of "fracking" - a revolutionary, yet-still-nascent process of extracting natural gas from rock bed.
Concerns stretched from sector performance questions all the way to the highly alarming and somewhat foolish argument that such an order precipitates a "government takeover of the natural gas industry."
Now, I'm overly cautious when the government announces any role in business. But when you take a close look, this announcement is actually rather benign.
And yes, I know it's easy to get caught up in the immediacy or negative impacts of a single act. But in the age of 24-hour media, we usually only hear a fraction of the real story.
The truth is there's a lot to like here.
That's why I'd like to take a few minutes today to explore the ongoing developments in this story, set a few eager minds at ease, and explain a few benefits - yes, benefits - of this Presidential directive.
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Natural Gas Prices: A Timeline for Investors… and State Budgets
State policy leaders around the country are going to realize the immense importance of LNG exports to the health of their economies as they struggle to pass their 2013 budgets this year.
The recent low in natural gas prices is doing more than just hamstring production around the country. It's also slashing government budget forecasts due to the loss of tax revenue associated with natural gas sales.
So much so, that states are predicting steep decreases in revenues through 2014.
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Natural Gas Game Changer: The U.S. Paves Way for Sabine Pass
Good News for Investing in Natural Gas: U.S. Government Approves Sabine Pass Plant
That breeze gusting through the streets this morning isn't the sign of a coming storm.
That's a collective sigh of relief coming from those investing in natural gas companies after a torrid first quarter for the sector. Natural gas prices have collapsed below $2 per 1,000 cubic feet for the first time in a decade.
And that's not even adjusted for inflation...
But on Tuesday came the first positive sign in months.
The U.S. government approved the development of the Sabine Pass plant, the first natural gas export facility in the lower 48 states.
CNN Money reports:
"The Federal Energy Regulatory Commission [FERC] voted in favor of Texas-based Cheniere Energy's plan to build a giant natural gas liquefaction and export terminal at Sabine Pass, which straddles the Texas-Louisiana boarder just north of the Gulf of Mexico.
Although environmentalists have threatened to sue to stop the 500-acre, $10 billion project, Cheniere says it plans to start building before July."
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