Natural gas continues to be one of the most frustrating commodities for 2012. After seeing prices hit new lows by the day, a number of investors speculated that its price could not possibly get any worse; they were wrong. NG futures are still struggling to establish a healthy trend as prices have dropped more than 17% on the year with over 8% of that coming in the trailing five day period. Low prices can be attributed mainly to this year’s winter, or lack thereof. The winter of 2011-2012 is on pace to be the mildest winter on record, as warmer than average temperatures have slashed demand for gas-powered utilities. This led to high stockpiles which, in turn, slaughtered prices to their current levels [see also 25 Ways To Invest In Natural Gas].
Currently 2012′s worst performing major commodity, NG seems to have insurmountable obstacles to overcome before it can work its way back up. Some analysts are predicting that prices can’t go much lower, but investors have heard that same rhetoric when NG hit $4, $3, and now $2.5, so it is difficult to know when to hop back in this trade, if at all. Recently, a number of big name producers have been intentionally slashing production in an effort to give relief to low prices, but this solution seems to be only temporary. For those looking to follow NG’s recent trend, a short position may offer an enticing opportunity, but also note that NG is extremely cheap, which may attract longer-term investors to the battered commodity [see also Three Commodity Plays For 2012].
Ways 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 April NG Natural Gas futures contract offered on the NYMEX. The April 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 7.6 million times each day. Note that UNG recently hit its historic low. For those looking to establish a longer-term position, the E-TRACS Natural Gas Futures Contango ETN (GASZ) seeks to eliminate contango with a unique strategy. 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 Beyond UNG: Three Intruiging ETFs To Play Natural Gas].
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Disclosure: No positions at time of writing.