With The Warm Weather, How Do You Profit From Natural Gas?

| December 19, 2014 | 0 Comments

natural gasIt’s been a decidedly bearish few weeks for natural gas.  Thanks to abnormally warm December temperatures across most of the US, the commodity is trading near 52-week lows at $3.57 mmBtu.  That’s down 17.8% over the past month!

Check out the chart…

Profit from natural gas, chart of natural gas

As you can see, the remarkable November rally gave way to equally spectacular December downturn.  As I mentioned in a recent article,   natural gas is a notoriously volatile commodity.  The past two months of trading is the perfect example of that volatility.

What’s The Next Move, And How Do You Profit From Natural Gas?

With the commodity trading near technical support (green line) at the $3.60 area, we have a great point of reference to initiate a new, low risk trade.

The question is, which way- long or short?

Let’s look at the data…

Last week’s EIA inventory report revealed a 64 bcf storage withdrawal- slightly above analysts’ estimates of a 62 bcf storage depletion.

However, the latest withdrawal was far below last year’s 285 bcf withdrawal.  Furthermore, it was well short of the 5-year average withdrawal of 168 bcf.

And listen to this…

The enormous inventory deficit created by last year’s brutal winter is gone.  Thanks to the past few weeks of warm weather, current inventories are now in line with last year’s levels.

All this data is bearish for natural gas.

But Weather Forecasts Point To A Looming Cold Spell

The National Weather Service’s 8-14 day outlook shows temperatures are set to fall below seasonal norms in the Central and Eastern US.

Take a look…

Profit From Natural Gas, NOAA Chart

As you can see, a large swath of the US is expected to see a return to below average temperature over the next two weeks.

With natural gas demand set to rise, there’s a catalyst for a short-term natural gas rally. 

Just how much the commodity rallies depends on the severity and length of the oncoming cold spell.

So How Do You Position Yourself For Natural Gas Profits?

We have two fundamental factors competing against one another.  Weak December storage withdrawals have brought inventories back to year ago levels.  That’s bearish.  But there’s a looming onslaught of colder than normal weather.  That’s bullish.

How will you play it?

If you think natural gas is priced too low heading into the heart of winter heating season (as I do), there are several ways to establish a bullish position.  The US Natural Gas Fund (UNG) and iPath DJ-UBS Natural Gas (GAZ) will rise as the commodity rallies.  What’s more, you can look to leveraged ETFs such as the VelocityShares 3x Long Natural Gas ETN (UGAZ) or the ProShares Ultra Bloomberg Natural Gas (BOIL).

On the other hand, you may be inclined to short natural gas due to bearish EIA inventory data.  The easiest way to do that is with ETFs like the ProShares UltraShort DJ-UBS Natural Gas (KOLD) or the VelocityShares 3X Inverse Natural Gas ETN (DGAZ).  When natural gas falls, these ETFs will rise.

Be sure to treat the leveraged ETFs like BOIL, UGAZ, KOLD, and DGAZ with care.  A move against your position may result in oversized losses.

Bottom line…

Competing fundamentals make it a tough call for natural gas right now.  But with the commodity trading at an important pivot level, there’s a profit opportunity available if you’re willing to accept the risk.

Until Next Time,

Justin Bennett

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

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Category: Natural Gas

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.