How to prepare for a natural gas market

Anyone who has ever traded will know that nothing about the markets is certain, so the idea of ​​predictable movement is fundamentally flawed. That said, however, there are times in certain markets where it seems clear that a move in a certain direction is coming, it’s just a matter of when it actually comes. This is true right now when it comes to US natural gas prices.

An analysis of the most basic supply and demand factors suggests that, at some point, natural gas prices are rising. The July Short-Term Energy Outlook (STEO) from the US Energy Information Administration (EIA), reported in this Reuters article, made clear why this is true. Natural gas production is set to decline this year as demand continues to rise. You don’t have to be an economics professor to know what this means for the price, or even to know why it happens.

Demand for natural gas has been increasing worldwide for several decades now as power generation has shifted from oil and coal to cleaner gas-fired plants. In response, production increased, but as with these things, production increases driven by high prices driven by that demand more than covered the increases in demand, and there has been a glut of gas in the market for some time. Prices, compared to long-term averages, have fallen and have remained around their lows for some time.

This has caused both an increase in demand and a halt in production increases and is…

Anyone who has ever traded will know that nothing about the markets is certain, so the idea of ​​predictable movement is fundamentally flawed. That said, however, there are times in certain markets where it seems clear that a move in a certain direction is coming, it’s just a matter of when it actually comes. This is true right now when it comes to US natural gas prices.

An analysis of the most basic supply and demand factors suggests that, at some point, natural gas prices are rising. The July Short-Term Energy Outlook (STEO) from the US Energy Information Administration (EIA), reported in this Reuters article, made clear why this is true. Natural gas production is set to decline this year as demand continues to rise. You don’t have to be an economics professor to know what this means for the price, or even to know why it happens.

Demand for natural gas has been increasing worldwide for several decades now as power generation has shifted from oil and coal to cleaner gas-fired plants. In response, production increased, but as with these things, production increases driven by high prices driven by that demand more than covered the increases in demand, and there has been a glut of gas in the market for some time. Prices, compared to long-term averages, have fallen and have remained around their lows for some time.

This has caused both an increase in demand and a halt in production increases, and it now appears that, at least in America, low prices are resulting in a real reduction in production. Then add in the effects of the AI ​​boom on electricity demand and we have the opposite of what we’ve seen recently, falling supply and rising demand, so it makes sense to assume that prices will come up at some point.

The problem is, we may not be at that point yet.

August’s STEO explains why. After a hot July that boosted electricity and therefore natural gas demand in the US, August was relatively cool, resulting in a decline that will likely continue as fall weather takes over. And remember, there’s still plenty of natty in the system.

However, with tensions remaining high in the Middle East, the war in Ukraine and now Russia, I believe that, continuing, and with North American production stagnant at best, it will only take slightly above-expected demand for there is significant movement. in the future, and that seems like enough of a possibility to warrant a trade, albeit one with a relatively tight stop.

This is too risky a trade to be involved with much leverage, so my preference here is for the US Natural Gas Fund (UNG) ETF.

I will buy UNG as close to $13 as possible with a stop at around $12, well below the $12.58 low hit earlier this month. The initial target is a break above $15, at which point I would adjust the stop just above my entry point, but ultimately if this works in the short term, I’ll be looking for around $17.50 in the long term longer. . This offers a very good risk/reward ratio, which is enough to justify the short-term risk of losing about 10% of my initial investment.

Should this stop be hit, I will stop and think again, as is my custom, but given the long-term dynamics of the market, I will probably look for another opportunity and another level to it goes longer. This could change should peace break out around the world or if there are signs of a real global recession, but barring these unlikely events, a long long position in Natty seems to be an inevitable play, or at least as close as you can expect in a traded market.