Natural Gas Price Bounced 56% in Six Weeks
In the USA, the natural gas price jumped 17% in a single day on Monday. Earlier, the end of June, the price hit a new low at 1.432 dollars–not seen for approximately 25 years. Then, it skyrocketed further to $2.238 on Friday. That is 56% higher than the June low. (Chart 1 and 2.) That was one of the most spectacular price movements in the commodity markets this year.
That is remarkable in such a short time. Even if it is a relatively illiquid asset. The reasons for the quick rise include the product has been oversold. Also, a heatwave was reaching the United States, which increases power consumption through air conditioners. And the bankruptcy of some producers may be also important because it can reduce supply. For example, Chesapeake Energy, the second-largest shale gas producer, declared bankruptcy in June. (NYSE: CHK.) Strong tropical storms are also approaching this year, which could cause supply problems. But the evergreen question by energy-type commodities is the storage:
The notion that gas stockpiles will start the 2020/21 winter at a seasonally low level helped Henry Hub gas futures to return to $2-and-above pricing this week.
Mayor Risks for Buyers and Short Sellers
The natural gas price has returned from the pit close to the $1.5 level several times over the past year. But is the level around $2.2 a good entry point? Should speculators buy or sell? In both cases, you face big dangers. Only some of them:
- There is a lot of upside space in natural gas prices. In autumn 2019, the price reached $2,900. And at the end of 2018, almost $5. Short-sellers can experience bitter surprises. Even luck is an important factor, such as the weather.
- With more bankrupt companies, supply can decrease and price increase further.
- On the other side, the huge contango makes long buyers vulnerable in the longer term. (About the contango and its risks, please read here.)
Only the nearest settlement price, for September, is relatively low, by $2.2. But you can’t buy it and wait for the winter heating season to sell it over $3.0. It expires earlier and you get the next futures contract, October or November, at a much higher price. Winter prices are already here. The natural gas price for December 2020 was $3.044 on Friday.
- A prolonged crisis, a W-shape depression with a double bottom can diminish the demand and send prices to the cellar.
Can Stocks or ETFs Track the Natural Gas Price?
So, this is a high-risk investment, the natural gas price is volatile. Leveraged products (futures, CFD-s) can become easily worthless. Stocks in the energy industry can be better in the longer term, as some companies can pay a dividend, and the contango isn’t affecting the buyer. But we mentioned the bankruptcy problem, remember to diversify, buy a stock basket. Unfortunately, you can’t find “pure natural gas” stocks ETFs, because most companies have a complex activity. (Like oil and gas production together.) A better choice seems to be, for example, this one:
The Alerian Energy Infrastructure ETF (NYSEARCA: ENFR) isn’t a pure-play on natural gas exploration and production. But that’s a plus, not a disadvantage. Rather, ENFR, which tracks the Alerian Energy Infrastructure Index, focuses on energy infrastructure, otherwise known as the “toll road” aspect of this industry.
How to Survive Natural Gas Contango?
How badly contango affects the long buyers, you can see on Chart 3 below. The nearest natural gas futures price was seven percent up in 12 months. But UNG (United States Natural Gas Fund), which is tracking near settlements, fell 29 percent in this period. UNL (United States 12 Month Natural Gas Fund LP) is buying longer, for example, December futures, reducing the losses because of the contango. It was only slightly in the negative in the chart. (DCNG–iPath Seasonal Natural Gas ETN–is also buying December settlements.)
The fund spreads its futures exposure equally across the nearest 12 contract months in an effort to minimize the impact of contango on returns
–wrote ETFdb about UNL.
Commodities have potential as an inflation hedge. Or diversification method. But buying positions often suffer from serious contango. So, being long in commodities, also natural gas, is more appropriate for short-term traders, speculators. In the longer term, buy stocks, or find special products less vulnerable to contango.