Readers of this blog know that I generally believe that there is no "commodity supercycle." Instead, I think the big moves up in the last few years are simply due to underinvestment in basic industries for the last 15 years. (Oil may be a little different; political problems make it unlikely that any amount of investment will clear the shortage up.) Nonetheless, there are a couple of bull trades that I think make sense here.
First is natural gas. NG prices are cheap: cheap relative to history and cheap against oil. There's a good reason for that. The weather in the northern US has been mild so far, leading to less need for gas use. Also, coal prices have fallen. NG competes with coal in the electrical generation market. Finally, we are in the hurricane season and so far -- nothing.
I think the time has come for a value trade in NG. As we approach the winter, the market will probably put a risk premium in Dec futures onward. Also, NG competes with some oil products for commercial/industrial demand. These users will undoubtedly do some switching. So we could see a pretty good move up in a month or two.
Two problems. First, it's always hard to buy a market in free fall. OTOH, that's what chart patterns and stops are for. You have to keep trying. Second, we might get to a situation where stocks are so high that they pressure storage capacity. If that happens, the nearbys could get destroyed.
The equity markets are giving some indication of value. NG equities have not had a (market-adjusted) retreat. So this is non-confirmation. Nonetheless, I think this is better as a commodity play. The snap-back in NG futures is likely to be severe.
to come - corn....
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