Do Sky-High Natural Gas Prices Present Trading Opportunities In Energy Stocks?
Welcome back from the holidays! I hope everyone had a wonderful time with
their families and friends.
While we ease back into trading, I want to call some attention to the Natural
Gas market and the stocks that rise and fall on whether the weather
(sorry, but I was dying to say that!) will be gentle or fierce.
Normally, we see natural gas prices increase in winter, as demand increases,
but this year the increases have been positively explosive. If you’re here
in Chicago, you know the winter has been our worst in over a decade, but
things have been pretty tough in the rest of the country as well. If you are
one of the millions that has seen your heating bill double, or even triple
over last year, you probably blame the bitterly cold winter, but you are only
half right. The other reason behind the surge is record low reserves, which
have contributed to natural gas catapulting from $1.40 to $8.95 per million
cubic feet. Since most of us don’t follow natural gas as closely as oil, we
offer that natural gas at $9 is equivalent to paying $90 for a barrel of crude
oil!
Here are my top picks for energy stocks poised to profit from today’s tight
market:
Several
interesting bull-call spreads popped up on our spread search this morning
(11:30 am CST). The EOG APR 50 — 60 call
spread is trading for $5 and is intrinsically worth 5 1/4, as the underlying is
trading for 55 1/4. The KMG APR 65 — 75
call spread is also attractive if purchased for $4, but had an intrinsic value
of just 1 5/8, as KMG is trading for 66 5/8. Both spreads are a bet on
continued higher profits from the producers and distributors, but given that
most analysts don’t expect prices to fall back anywhere near their historical
range of between $1.50 and $2, we think both represent reasonable values.
