Natural Gas Prices at Bottom?

Natural Gas Pains
Joseph Hargett, Option Advisor, 02.06.09, 02:20 PM EST
Options players can cash in on the overall weakness in the sector by loading up on some put options.
According to the latest data from the Labor Department, the U.S. economy just experienced its worst month of job losses since 1974. The economic report only underscored the growing problem that energy providers are facing in the current market: falling demand and falling prices.

In fact, natural gas prices have plummeted throughout the recession, plunging more than 66% from a high of $13.69 per million British thermal units (BTU) in July 2008 to approximately $4.60 per million BTU on Friday.

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What's more, the AMEX Natural Gas Index (XNG) has paced the decline in natural gas futures, giving back more than 48% since July 2008. During this time frame, the index has fought a losing battle with resistance at its 10-week and 20-week moving averages. Furthermore, the 20-week moving average has descended into the psychologically important 400 region, an area that has held the XNG in check since early December.

Despite this poor price action, options traders are betting heavily that the sector has formed a bottom. Specifically, the composite Schaeffer's put/call open interest ratio (SOIR) for XNG components rests at 0.56, in the 36th percentile of its annual range. Furthermore, only 7% of the 98 analysts covering natural gas stocks rate them a "sell."

Should energy prices continue to deteriorate in the midst of this economic turmoil, we could see this bullish sentiment unwind in the form of added selling pressure for the natural gas sector.