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Investing in Natural Gas

2 Comments April 7, 2009 – 1:43 am |   | Permalink |  Print This Post |

We have opened a long Natural Gas ETC at 0.735 - 2000 units. Natural Gas May 09 contracts are trading at $3.68-3.75. Refer to charts below. Whilst Crude oil has gone up with the market rally, Natural Gas have remained depressed and is trading close to recent lows. The ten year low for Natural Gas is about $2 (refer to chart). We believe a multimonth rally is here, and that prices of all commodities (should) rise with the market. Technically, NG is extremely oversold and is due for a recovery (albeit a temporary one until the next decline). We have anchored very lightly, and have chosen ETC simply because it has NO EXPIRY date, which from experience is important for non-day traders like us. Close to expiration, prices of commodities are usually subject to extreme manipulation defying all logic and fundamentals - usually depending on the net short:long and the direction it moves really is beyond us. Our monthly indicators suggest a multimonth rally is approaching, potentially one more dip down (which will suit our under leveraged position just fine) before heading up.

Ten Year Natural Gas Price Chart www.theinflationist.com

Ten Year Natural Gas Price Chart www.theinflationist.com

Natural Gas Price 1 Year www.theinflationist.com

Natural Gas Price 1 Year www.theinflationist.com

We are tempted to hit harder but will stick to our Rule that you can never pick the turning point. General restrain is required after such a massive rally (more significant upside to come medium term), as we hope for a pull back to reenter more longs.

Natural Gas prices vary seasonally - naturally higher during winter and lower during summer (hence further decline is not unexpected). Whilst the relationship between Crude Oil and Natural Gas is complex, most analyst use a simple rule that prices for Natural Gas should be about 6:1 (Crude Oil: Natural Gas). Historically, a ratio of 10:1 is used, but this ratio was underpricing natural gas in recent years (suggesting a shift to natural gas) hence the shift to a 6:1 ratio. Referring to the chart below, neither the 10-to-1 (green) nor the 6-to-1 rule (orange) of thumb fits well. 10:1 underprices natural gas prices consistently, and the 6-to-1 rule generally overprices natural gas most of the time. Considering the current prices of Crude Oil ($51) and Natural Gas ($3.75) at the time of writing, the ratio of Crude Oil to Natural Gas is 13.6. Referring to the chart below, the only times where the price of NG dips below the price based on the 10:1 ratio is during acute drops, followed by a sustained recovery after.

Those who wish to play this safer may choose to short Crude Oil proportionaly, essentially playing on the ratio. We will consider this option (lower profit potential which suits us fine), but ideally would prefer positions with NO EXPIRY.

Natural Gas to Crude Oil Ratio www.theinflationist.com

Natural Gas to Crude Oil Ratio www.theinflationist.com