Sean Dillon   |   January 23, 2012

On Thursday, we initiated a position in the First Trust Natural Gas ETF for our Dynamic Moderate, Dynamic Appreciation, and Dynamic Ultra-Appreciation clients. The price of natural gas — used by millions of homeowners for heating — reached a new 10-year low last week at $2.32 per MMBTUs (1 million British Thermal Units), or 1 cubic foot. The price was trading near $11 in 2008, right before the energy market crashed. Most analysts attribute the current price weakness to a much warmer winter than usual, and of course, much larger supply than demand.

It’s not usually fun to catch a falling knife, but we felt the bearishness in natural gas and natural gas producers had become extreme. We recognize that the production of natural gas in the U.S. alone increased 17 times since shale exploration became widespread, but at some point supply and demand factors change.

On the supply side, the second largest U.S. gas producer, Chesapeake Energy, announced this morning that it was cutting gas production by 8%, and Halliburton announced it was shifting production away from gas-only areas. On the demand side, natural gas is attractive as an intra-energy play now that the price of crude oil is over 40 times more expensive. We feel it is only a matter of time before this trend reverses itself, and even if the relationship does not revert back to the mean around 10, the natural gas companies may have seen the worst.