The Trend Is Your Friend
Seasoned traders in the pits of the commodity exchanges in New York and Chicago used to tell their clerks, “The trend is your friend.” In this case, this is the perfect way to describe your trading strategy for natural gas. A trend has clearly been established, on the upside. Sure, there is plenty of supply coming in due to the large amounts of shale gas that have been uncovered on the continental United States. However, much of the infrastructure required to get that supply to market is still being built. Combine this with the cold weather and you get a very compelling scenario where natural gas prices will continue going up.
One convenient way to play the natural gas market right now is through the ETF United States Natural Gas Fund (NYSE:UNG). This ETF has already seen increases of more than 8 percent during the last week and more than 24 percent over the last month. The expectation of many professional weather forecast services is that February and March will experience record cold, and that is surely going to be a catalyst pushing natural gas prices forward.
Natural gas prices, when looked at from a historical perspective, are still trading at relatively low prices—we are nowhere near the $12, $14 or even $16 mark we experienced a few years ago. That said, always remember that natural gas is one of the more volatile commodities, so make sure you approach this as an active trade as opposed to a long-term passive investment.
Disclosure: The author doesn’t have any positions in the stock mentioned.
Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at [email protected].