Why It’s Time To Buy Natural Gas

Natural gas is one of the most frustrating commodity investments on the market. With volatile daily swings and unpredictable behavior, the industry has demonized this investment vehicle, and for good reason. A quick glance at a chart of natural gas prices over the past few years shows a downward slope starting in mid-2008 and continuing all the way through today. In fact, since its highs in 2008, natural gas prices have lost over 70%; one of the worst performing commodities over that time period. It is because of performance factors like this, that this commodity has established itself as a trading instrument rather than a buy-and-hold investment, but the coming month may present new opportunities [see also 25 Ways To Invest In Natural Gas].

Natural Gas Woes

The past few weeks have been miserable for natural gas, as weather patterns around the country have done well to create major headwinds for prices. Mild weather has created something of a chain reaction, starting with low demand. With temperatures sitting well above average levels, the demand for natural gas-powered appliances has shrunk considerably. This lack of demand has led to stockpiles and inventories well above average, which finally hits prices by pushing them lower. The month of December alone saw losses around 10% for natural gas, continuing a monthly losing streak that began in June and has yet to let up. But for all of the problems that natural gas has faced, it may be poised for a nice short-term pop [see also 12 High-Yielding Commodities For 2012].

Now that we have gotten into the new year and winter seems to have finally hit the majority of the country, natural gas prices will likely see a fair amount of relief. Colder temperatures means more use and demand for heating devices and gas, which will lower inventories and stockpiles. This will help to drive prices up in the short run and create a juicy opportunity for investors who can stomach the volatility that a natural gas-based investment is typically handcuffed to. Most natural gas positions are measured in minutes and hours rather than weeks or months, but the drop in temperatures could potentially make natural gas a good buy over the coming days and weeks. As with all commodities, careful monitoring of the position is essential, but there is a real opportunity to produce a quick return and start the year off on a positive note [see also MLPs: CEFs, ETPs, or Mutual Funds?].

This position will almost certainly turn sour over the long term, so it is important to enter the trade with an exit strategy in mind as this opportunity only looks lucrative in a very short time span. Investors are urged to practice profit-taking as well as stop-loss orders to help minimize losses [see also How To Lose Money Investing In Commodities].

Below, we outline several different ways for investors to make a play on the commodity.

• NG Natural Gas Futures: These Henry Hub contracts are offered on the NYMEX and are some of the most popular and liquid futures on the market. Contracts are quoted in U.S. dollars and cents per million British thermal units (mmBtu) and one contract represents 10,000 mmBtu. This option will certainly offer the most pure exposure, but it will also come with the heaviest risk factor of any of the options on this list.
• United States Natural Gas Fund LP (UNG): This ETF has made a name for itself by being one of the most volatile investments available; a trader’s dream. The fund tracks front-month futures contracts while charging fees of 0.60%. This may be a good option for those looking for close-to-the-ground exposure but who are not comfortable with complex futures trading that often hangs portfolios out to dry.
• Devon Energy (DVN): This equity stock will be the safest option on the list, but will also be a more indirect play in comparison to the two aforementioned vehicles. Devon has its hands in various sectors of the natural gas market and is an immensely popular investment; the fund has trades hands over 3.5 million times daily and has a market cap topping $26 billion.

Disclosure: No positions at time of writing.