MKM Sees Natural Gas Short-Squeeze Trade

In a new report on the energy sector, analysts at MKM Partners discussed natural gas’ recent underperformance and explained why they believe slumping gas prices have created an opportunity for traders. Analysts also detailed their preferred way to profit from the opportunity.

Energy Recovery

The energy sector was a major underperformer in 2014, falling about 10 percent on the year and lagging the surging S&P 500 by a wide margin. So far in 2015, the energy sector has been leading the charge, up 8 percent in the past month.

A large part of the sector’s strength has resulted from surging crude oil prices, which have risen nearly 30 percent from March lows. Shares of the United States Oil Fund (ETF) USO are up more than 18 percent in the past month.

Analysts believe that there is still upside to oil prices and predict that crude oil will soon make its way in to the low $60 range.

Lone Exception

The exception to the recovery in energy has been natural gas. So far in 2015, natural gas prices have fallen 15 percent.

However, natural gas may now be well-positioned for a short squeeze that could send prices higher by as much as 15 percent in the near-term.

Analysts point to RSI momentum divergence, high levels of net short positions, extremely bearish sentiment, and historical seasonal strength in gas prices as four reasons they believe a short squeeze in natural gas is imminent.

How To Play It

MKM expectS that the short squeeze will drive natural gas prices back to the $3 range. MKM recommends traders set $14.80 as a target for the United States Natural Gas Fund, LP UNG with a stop in place at $12.28.