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Thanks to some November snow and plunging temperatures across the Northeast and Midwest, natural gas is once again in focus. The commodity is vital for both heating and cooling, suggesting that traders could see some more activity in natural gas trading if the cold temps hold in the Northern part of the nation.
Expectations over a big drawdown or smaller increase in supplies could also help to signal to the market that winter demand is here already, helping to shift perceptions about how the season will play out. “A withdrawal from inventories would tell the market that winter is already here,” said Tom Saal, senior vice president of energy trading at INTL Hencorp Futures LLC in Miami. “We’re obviously seeing colder weather than what people remember from the latter part of last year.”
Thanks to these expectations, which look to either be proved true or false in Thursday’s storage report, investors should look to some of the natural gas ETFs currently on the market. Since the opening of trading on Friday morning, these ETFs have been on a tear and could be in for some more volatility as the rest of the week unfolds (read The Comprehensive Guide to Natural Gas ETFs).
(UNG - ETF report), easily the most popular natural gas ETF on the market, is up more than 6.4% for the time frame in question including a roughly 4.5% gain during Tuesday trading. Meanwhile, the leveraged options in the natural gas space, (UGAZ - ETF report) for 3x daily exposure and (DGAZ - ETF report) for -3x daily exposure, have respectively gained and lost over 15% in the three day period in question.
Yet while the pure commodity space has obviously been greatly impacted by these shifting perceptions on the natural gas market, those that target natural gas equities have been pretty much unchanged in the face of these issues. The top way to play this in ETF form, the First Trust ISE Revere Natural Gas Index ETF (FCG - ETF report) is flat in the same period, suggesting once again that it isn’t nearly as volatile as its commodity market cousins (read Natural Gas ETFs: Futures vs. Equities).
How to Play
While it is hard to say how the often rocky natural gas market will play out over the next few days, it arguably isn’t looking good for those betting on reduced prices. Colder than normal weather is projected over the next few days in many of the key consuming markets and supplies rose by 21 bcf last week, and in this week over the past five years, supplies have risen by 36 bcf on average, so we could see a level far lower heading into Thursday trading.
Seemingly a lower risk way to attack the problem is by looking at the equity firms in the natural gas space with a fund like FCG. Although this isn’t a strategy that will make a ton of money either way, it could be a lower risk way to play a natural gas price increase in the near term, or an interesting part of a pairs trade with one of the aforementioned natural gas commodity ETFs as well (read Buy American with These Three Commodity ETFs).
If any of these ideas don’t appeal to traders out there another lower risk strategy in the commodity ETF world is to look at the United States 12 Month Natural Gas Fund (UNL - ETF report). This product spreads out exposure over 12 different contract months so one particular good or bad report isn’t likely to sway this fund as much (see Volatility ETFs Winning on Fiscal Cliff Turmoil).
Due to this, the product is likely to benefit in price appreciation along with UNG—it is up about 5.3% in the trailing three days—but it won’t be as volatile. Clearly this can work both ways but it could be a fund worth considering for lower risk commodity investors if natural gas continues to take a bullish turn before Thanksgiving.
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