A Reason to Hold Off Jumping Aboard the Natural Gas Bandwagon

  • SumoMe

A lot is being made of the recent and sharp upside reversal in the price of natural gas.  This is not surprising since natural gas has been in a long-term decline since roughly July of 2008.  However, in order to gain the proper perspective, note:

*The sharp upside reversal in Spot NG displayed in Figure 1 below.

*The monthly performance for Spot NG displayed in Figure 2 below.

1Figure 1 – Daily Spot Natural Gas (Courtesy: ProfitSource by HUBB)

2Figure 2 – Monthly Spot Natural Gas (Courtesy: ProfitSource by HUBB)

In the context of Figure 2, the “sharp advance” displayed in Figure 1 is not quite as impressive.

While there is nothing that says that the recent advance in NG cannot continue, it may be useful to note that historically the early part of the year is not always “kind” to natural gas.

Specifically:

*The period from the end of January Trading Day #5 through the end of February Trading Day #11 has tended to be bearish for natural gas

Figure 3 displays the growth (such as it is) of equity achieved by holding long one futures contract of natural gas during the time frame listed above since 1991.3Figure 3 – Cumulative $ +(-) holding long one NG futures contract between Jan TD 5 and Feb TD 11 (1991-2015)

Figure 4 displays the year-by-year $ gain or loss achieved by holding long one futures contract of natural gas during the time frame listed above.

4

Figure 4 – Yearly $ +(-) holding long one NG futures contract between Jan TD 5 and Feb TD 11 (1991-2015)

In a nutshell, NG has:

*Advanced 9 times (36%)

*Advanced 16 times (64%)

*Average $ gain = +$5,195

*Average $ loss = (-$8,528)

Summary

A close look at Figures 3 and 4 reveals that large gains for natural gas are certainly possible during the supposedly “bearish” Jan-Feb time period.  But the point is not to convince you that natural gas cannot advance from here nor that natural gas is sure to head lower from here.  The point here is simply to suggest that – despite the recent strength in NG – the historical odds favor allocating your capital elsewhere for a little while.

If you remain compelled to play the long side of NG here, I suggest taking a look at an option position in the ETF ticker UNG in order to limit your downside risk.

Jay Kaeppel

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