Natural gas, one of the most popular commodities in the world, has been under the microscope lately as its volatility has gone through the roof. Normally, this time of year sees gas prices rise as demand around the world increases to combat the cold weather. But due to a mild start to the winter, many people are getting along just fine without their gas-powered heating utilities. When it comes to trading natural gas and its price outlook, the general rule of thumb is not to look to today’s weather necessarily, but the coming ten-day forecast for the majority of the country. Gas prices will be more in line with the 10 day average than any one particular day, making it a commodity that requires constant monitoring [see also 25 Ways To Invest In Natural Gas].
With 2011 presenting an unseasonably warm November, natural gas stockpiles have soared to new highs. As demand has dipped, inventories have shot well above their five year average, with the EIA reporting a rise on almost a consistent basis. In fact, other than last week, the most recent drop in inventory came way back in April, putting natural gas on a slippery slope for the last few months. But as we make our way into the winter months, demand for this commodity will no doubt rise, as people will need to beat the cold any way they can. With that in mind, natural gas’ beaten down price creates a unique trading opportunity for today’s markets [see also Analyzing Five High Yielding Oil & Gas Pipeline Stocks].
How To Play
For investors who have a strong opinion on where natural gas is headed, or for traders looking to make a quick return, there are a wealth of options available. Perhaps the most direct method comes from the January NG Natural Gas futures contract offered on the NYMEX. The January contract is currently the most heavily-traded future and will offer the best liquidity. Traders may also be interested in the ETF, United States Natural Gas Fund LP (UNG), as the product changes hands over 9 million times each day. Note that UNG recently hit its historic low. For those looking to establish a longer position, the E-TRACS Natural Gas Futures Contango ETN (GASZ) seeks to eliminate contango with a unique strategy, making it a candidate for a longer position. Income investors may be interested in an MLP like Kinder Morgan Energy Partners (KMP), as it will make an indirect play on natural gas while offering an enticing yield [see also Three Commodities Dividend Lovers Must Own].
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Disclosure: No positions at time of writing.