Natural gas has been one of the best performing commodities in recent months for the bulls with prices appreciating by 33% off their lows in mid-February bouncing from $3.30 and making its way last week north of $4.40. This lifts prices to their highest level since July of 2011. Coincidence or not in 2011 from its peak just above current trade by year’s end futures were trading 40% lower…will history repeat itself?
Past performance is not indicative of future results but it is my opinion that current levels are not sustainable. As temperatures warm up we should start to see injections in weekly inventory as opposed to draws. This has not been the case of late because of a winter that will just not end. Demand for natural gas has traditionally been highly cyclical. Demand for natural gas depends on the time of year, and changes from season to season. In the past, the cyclical nature of natural gas demand has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. Looking at a calendar with the highest demand in theory behind us I would anticipate a retracement in the coming weeks.
In addition to this cyclical demand cycle, there are two primary drivers that determine the demand for natural gas in the short term. These include:
Weather – as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The colder the weather during the winter, the more pronounced will be the winter peak.
Fuel Switching – supply and demand in the marketplace determine the short term price for natural gas. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely.
My favored play is gaining bearish exposure via futures and selling out of the money puts 1:1. A move south would be confirmed on a settlement below the 8 day MA (orange line) in the chart above. A 38.2% Fibonacci retracement drags prices of June future back to a key psychological level of $4. I’ve advised clients to trade July contracts which are currently trading at a 3 cent premium to June. The options my clients are selling have a 30-40% delta so on a price collapse they should be able to pick up 40-60% of the futures move as the delta will increase as prices decline on the option…trade accordingly.
As always, I’m here to discuss specifics and give guidance. Give me a call… To discuss in more detail this chart or any other you can reach me at: firstname.lastname@example.org or 954-929-9997