Investors Making Big Bets on Natural Gas

This summer has shaped up quite differently than the one just a year ago, throwing a wrench into a number of commodities. 2012 was the warmest calendar year in U.S. history, and the summer was especially hot. This year has been a different story, as temperatures have remained relatively low with only a few heat waves in comparison to 2012. While it may be nice to save on electric bills and still stay cool, the lower temperatures have presented natural gas with an uphill battle in a time when it usually flourishes [for more natural gas news and analysis subscribe to our free newsletter].

Natural Gas Seasonal Trends

Typically, natural gas makes a run higher from early April into mid-June as higher temperatures cause a spike in demand. But this year, the demand has been much lower, causing the Energy Information Administration to lower their annual price target amid mild weather. What’s worse is that natural gas’s seasonal trends show that it almost always enters a sell-off period at the beginning of August that lasts for nearly a month.

Natural GasIt’s what natural gas does after the sell-off that has investors chomping at the bit. Aggregating the past 30 years of natural gas performance shows that it makes a major low in early September before making a massive run-up through the middle of October. That trend has sparked a number of traders to rush into natural gas products, awaiting for what seems like an inevitable run higher [see also 25 Ways To Invest In Natural Gas].

Big Natural Gas Bets

Since the beginning of June, the United States Natural Gas Fund (UNG) has seen inflows of just over $126 million, or about 14.6% of its current assets. Over that same time period, the fund is down 17.6%, but investors keep piling in.

What is even more interesting is the inflows for the 3x Long Natural Gas ETN (UGAZ), which adds a 300% leverage to natural gas futures contracts. That fund has seen inflows of just over $200 million since the beginning of June, but has lost 22.7%, dragging total assets under management to just $114 million. Despite the fact that their money is shrinking for now, traders and investors have been more than willing to pile into this rather dangerous leveraged fund in the hopes of a handsome reward [see also Understanding Contango: Natural Gas Example].

Both of the aforementioned products are great for anyone looking to make a bet on natural gas, but they will require a rather large risk appetite. Natural gas is among the most volatile commodities, making UNG on of the more volatile funds. Add in the 3X leverage from UGAZ and you have the recipe for a potential disaster. Investors are advised to keep a watchful eye on their natural gas positions over the next two months and be prepared to execute if their positions reach their target levels or surrender too much ground.

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Disclosure: No positions at time of writing.

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