They call it the “widow maker” for a good reason. Attempting to trade natural gas, both on the long side and on the short side, has destroyed the accounts of many eager investors throughout the years. The potential rewards are great, but the volatility risk is legendary.
I remember a couple of years ago, when “natty” already seemed overextended and ripe for a short trade. Natural gas had zoomed from $2 per million British thermal units (mmBTU) to $5, more than doubling due to projections of an extremely cold winter of 2021.
That short trade would have been disastrous, as Putin ordered Russia to invade Ukraine and natural gas then catapulted from $5 to $10. With that, many traders’ wives were made into widows, no doubt.
Thus, a problem with trying to short-sell natural gas is that there’s no telling how high it might go: $5? $8? $14? These are all possible and have happened on more than one occasion.
Of course, this doesn’t stop many traders from trying to call the top and short natural gas back down to $2. It’s a dangerous proposition, and I don’t recommend attempting it.
On the other hand, calling a natty-gas bottom might be a little bit easier. In recent memory, the Henry Hub (i.e., U.S.) natural gas price hasn’t ever stayed below $2 for very long. Even the COVID-19 pandemic couldn’t keep the price under $2 beyond August of 2020.
Courtesy: Art Berman
Speaking of which, natural gas just fell below $2 for the first time since the COVID-19 pandemic. It’s been a brutal sell-off, with natural gas slipping 11% in the week ending February 9.
The COVID-19 decline was easier to make sense of, since there was a fear of broad-based demand destruction in the commodities markets. This time around, however, natural gas below $2 seems a bit baffling.
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After all, Russia is still invading Ukraine, though it’s not front-page news in the U.S. anymore. Today’s geopolitical and economic backdrop certainly isn’t the same as it was a couple of years ago – but then, it might actually be more natty-favorable than the market realizes.
That’s because fast-emerging India is poised to drive intense demand for natural gas in the coming years and decades. India Prime Minister Narendra Modi recently declared, “In primary energy mix, we are pushing to increase natural gas to 15% from 6%. For this, in next five to six years, around $67 billion will be invested.”
Long-term commodities investors cannot simply ignore this. As India’s populace seeks a middle-class lifestyle and all of its trappings, this will require enormous usage of oil and natural gas.
Courtesy: Energy Information Administration (EIA)
Yet, traders U.S. don’t have to look very far out in time or distance to see the intense demand for natural gas. According to the Energy Information Administration (EIA), “A record high of 141.5 billion cubic feet of #naturalgas was consumed in the U.S. Lower 48 states on January 16, 2024, exceeding the previous record set on December 23, 2022.”
Evidently, Americans are using electricity like there’s no tomorrow, and natural gas is often the main source of power for residences and businesses in the U.S. So, if there isn’t a widespread consumption decline, why is natural gas below $2?
As The Kobeissi Letter succinctly summed it up, “Warmer than expected temperatures have dampened demand for natural gas and inventory gluts are building.” The market is always forward-looking, so perhaps the weather wizards anticipate a not-so-chilly winter later this year.
But then, long-term weather predictors sometimes aren’t much better than long-term financial-market predictors. I’m certainly not telling anyone to open up a futures account and buy natural gas contracts, or to buy exchange-traded products like UNG or BOIL.
Rather, I’m just here to remind everyone that India’s evolution and expansion will present tremendous opportunities for forward-thinking investors. And, if there are businesses that can capitalize on multi-year trends in the power sources that make modern life possible, these may be the soon-to-be standout stars to bet on.
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