almost every trading day brings volatile price swings and chaotic chart patterns.
For those who want to play, it’s an attractive market with a lot of potential upside. But playing natural gas isn’t for the faint of heart — at least, it hasn’t been for a long time. That may soon be about to change, though.
2012 is looking to be the year that natural gas — long considered to be strictly a trader’s game — opens up to investors. And today, I’m sharing with you four ways to get exposure to today’s low natural gas prices in the way that best fits your trading and/or investing style.
Natural Gas Prices Jam on the Brakes
Many in the commodities trading realm, including yours truly, have shied away from trading it over the years. From a technical standpoint, over the past three to five years, natural gas prices have been in a downward slope that started in mid-2008 and continued all the way through today.
In fact, since its highs in 2008, natural gas prices have lost upward of 70%. That makes it one of the worst-performing commodities for that period.
So it’s easy to understand why even veteran commodity traders are skeptical about natural gas as a long- or even intermediate-term investment. In fact, many traders simply use natural gas futures and options as a short-term trading vehicle to take advantage of anomalies and price swings.
However, 2012 could prove to be a big year of change for natural gas and its perception by investors.
Prices under Pressure,but Building up for a Pop
The early weeks of 2012 have been miserable for natural gas, as much of the country’s mild weather has perpetuated low demand for it. Even with a cold snap here and there, temperatures are sitting well-above average levels for most of the country for this time of year.
Since demand is slack, stockpiles and inventories are also above average, which pushes prices even lower. In December we saw losses around 10% for natural gas futures, and that downward decline has been going on since June.
Even so, despite all the selling and inventory pressure, natural gas may be getting ready for a nice short-term pop — even off a technical correction and oversold condition.
Now that we are in the full throes of winter, though, natural gas prices will likely rally as colder temperatures means more usage is almost certain. Demand for heat and, in turn, gas furnaces will lower inventories and stockpiles rapidly.
This seasonal demand will potentially drive prices up and, in the short term, generate opportunities for investors who can handle the volatility and risk.
Before You Make Your First (or Next) Nat Gas Trade …
Typically, natural gas trades have a very quick turnaround, especially for futures traders who can hold their positions very briefly. However, a protracted drop in temperatures for the remaining weeks of winter could potentially make natural gas Exchange-Traded Funds and even individual natural gas producers a good buy over the coming days and weeks.
As with all volatile commodities, natural gas requires investors to be nimble and cautious. At the same time, however, there is a real opportunity to produce a quick return and start the year off on a profitable note.
Remember, natural gas pricing is seasonal and can change rapidly, so this position requires that when you enter the trade that you also have an exit strategy and timeline in mind.
4 Ways to Play Natural Gas
Depending on your trading or investing style, there are plenty of ways to play natural gas. Today we’re going to look at a futures contract, two ETFs and a stock so that you can get in on the right type of investment for your portfolio before natural gas heats up and prices start to expand.
One way to trade natural gas is through futures and/or futures options. A good place to start is with the Natural Gas (NG) futures contract.
The natural gas futures contract is based on the Henry Hub pipeline supplies and is offered on the New York Mercantile Exchange (NYMEX), which is home to some of the most popular and liquid futures on the market.
This option will certainly offer the most pure exposure, but it will also come with the heaviest risk factor of any of the trading possibilities on our list today.
Natural gas futures contracts are quoted in U.S. dollars and cents per million British thermal units (mmBtu), and one contract represents 10,000 mmBtu. The pricing can be a bit confusing, so be sure to speak with your broker to make sure you understand what you are looking at.
Or you can also take advantage of natural gas opportunities using key ETFs like the United States Natural Gas Fund LP (NYSEARCA:UNG)
This ETF is certainly not for the meek. In fact, it’s one of the most volatile investments available — a trader’s dream, in many respects.
The fund tracks front-month futures contracts while charging fees of 0.60%. This may be a good option if you’re looking for close-to-the-ground exposure but are not comfortable with the complexities and risks that can accompany futures trading.
Be sure to look at UNG and understand the volatility of how it trades before adding a position.
Another option to consider is the Teucrium Natural Gas Fund (NYSEARCA:NAGS). This ETF spreads exposure across multiple maturities, and was designed to be more indicative of spot prices over the long term. UNG may be better for short-term traders, but NAGS makes sense for those with a longer time horizon.
Would you prefer sticking with the familiarity of stocks? You can buy a key natural gas company like Devon Energy (NYSE:DVN).
For the equity investor who wants to avoid futures and options, Devon will be the safest option on the list — but will also be a less-direct play in comparison to the futures and key ETFs mentioned, so results may differ greatly.
Devon is involved in multiple operations and various sectors of the natural gas market and is an immensely popular investment. Devon offers good exposure to rising natural gas demand.
There is no doubt that natural gas is a volatile and risky sector, but it’s also filled with opportunity, and 2012 could be a very profitable year for those who invest correctly in it.
Related Tickers: United States Natural Gas ETF (NYSEARCA:UNG), First Trust ISE-Revere Natural Gas Index (NYSEARCA:FCG), Chesapeake Energy Corp. (NYSE:CHK), Devon Energy Corp. (NYSE:DVN), iPath Dow Jones UBS Natural Gas (NYSEARCA:GAZ).
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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