Natural Gas: Buyer Beware!
Without question, natural gas has become one of the wildest markets I watch. The energy commodity is screaming to multi-year highs thanks to the relentless cold enveloping the eastern half of the US this winter.
Take a look…
As you can see, natural gas has entered a parabolic move to the upside over the past few days. Low US inventory levels have investors concerned the next cold front is going to push this market into a full-blown scarcity situation.
Speaking of the next cold front, take a look at the NOAA’s revised forecast…
Believe it or not, another hefty cold spell is bearing down on the already hard hit Midwest and Northeastern US. And with US inventories already sitting 40% below last year and 33% below the 5-year average, bulls are in firm control of natural gas.
So with that said, is it safe to bet on further price gains in the commodity?
To put it simply… no.
While it’s tempting to join this bullish party, the risk/reward doesn’t support doing so.
Let me explain…
The last time natural gas traded at $6 mmBtu was way back in 2009. That was after it shot up 100% from the $3.00 mmBtu it traded at a few months earlier.
But following that epic run, the commodity fell back to $4 mmBtu by the end of March- a 33% slide. Anyone who bought natural gas (or one of the many ETFs based on the commodity) at those $6 highs paid a hefty price.
Will natural gas succumb to a severe downdraft again this year?
In my opinion, it’s only a matter of time.
But given current information, it’s hard to pin down exactly when it will happen. After all, Old Man Winter is giving it his all this year. And the longer he sticks around, the longer natural gas will stay elevated.
But here’s the deal…
The easy money has been made this heating season. Natural gas is up 50% from mid-January and 80% since August of 2013. Realistically, the odds of big additional price gains from now through April just aren’t that great.
In other words, the risks of getting long natural gas at $6 mmBtu greatly outweigh the potential rewards.
As a matter of fact, given the current froth in this market, a $1.50 drop in natural gas over the next two months is much more likely than a $1 gain.
So if you’re long the US Natural Gas Fund (UNG) or any other bullish natural gas ETF, be careful!
Until Next Time,
Justin Bennett
Category: Natural Gas
