Utilities Rise As Natural Gas Wobbles
Syncubate | Sep 21, 2014 12:23AM ET
Over a month later, natural gas prices, as reflected by the United States Natural Gas Fund ETF (ARCA:UNG), continue to wrestle with overhead resistance while refusing to give up support below.
The bulls and bears have maintained a tug of war that has left many traders out of this market until it decidedly follows through with a push in one direction or the other. Interestingly, utility stocks, which took a hit when natural gas prices declined over the summer, have recently been displaying some signs of strength.
In this analysis, we present an example of one such utility stock, NRG Energy Inc. (NYSE:NRG) and question whether its recent rise is foreshadowing a near-term upside tick in natural gas prices as well.h3 NRG vs. UNG: Weekly Chart Comparison/h3
In comparing the weekly performance of NRG versus UNG, it's evident that both securities took a significant haircut in value beginning in June and extending into early August, as noted by the red arrow on the chart below.
What's surprising then is how quickly the fall in UNG had a negative impact on NRG shares. It's clear from the chart - investors wanted nothing to do with the stock as soon as they saw natural gas tanking. NRG fell from a high of over $38 in June to a low of $29.03 by early August.
Now we're seeing an evident disconnect in the price action of NRG versus UNG. While UNG is pretty much flat-lined, wobbling between the $20.50 support and $22 resistance levels, NRG has been steadily rising over the past several weeks.
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NRG found support at $29 in August and decisively reclaimed the $30 level by early September. It has not closed below $30 on the weekly time-frame since then, and finished out last week's trading at $31.25 a share.
It was reported in early September that NRG's CEO, David Crane, purchased 5,000 shares of the stock on the open market at an average price of $30.49 a share. This disclosure likely supported bullish conviction.
Whether the price action in utilities such as NRG is reflective of an expected rise in natural gas prices remains to be seen. For UNG, bulls would have to ideally push for a close through $22 on the weekly chart and maintain a continued hold above that level to reflect a sentiment shift to the upside in the intermediate term. So far, the $20.50 area has held as downside support.
It's important to keep in mind that the natural gas market is susceptible to being influenced by geopolitics. The existing tension between the Ukraine and Russia is a looming example. Russia supplies much of Europe with natural gas and could potentially use this as leverage as the conflict plays out. Any extended disruption in supply would most certainly support a rise in the commodity's price.
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