Natural Gas Trading: Opportunities for Both Shorts and Longs

Sam Subramanian PhD, MBA

Yesterday's natural gas inventory report from the U. S. Energy Department's Energy Information Administration (EIA) provided traders and investors a grim reminder on the over-supply of natural gas.

The EIA reported that natural gas stored in the lower 48 states amounted to nearly 3.6 trillion cubic feet. This tally is the highest on record on a seasonally adjusted basis since record keeping began in 1975. The inventory overhang is close to EIA's estimated peak storage capacity of 3.9 trillion cubic feet.

Reacting quickly and decisively, traders pushed to the spot price of natural gas below $3 per million BTU. Natural gas futures prices however have been more resilient, pinning hopes on a cold winter and a recovering economy. The contango price structure is so steep that natural gas for November delivery trades at a nearly 60% premium to the October spot price.

For the near-term, the short side of the natural gas futures trade looks more appealing given the massive natural gas inventory overhang. Speculators can get into the action through the NYMEX natural gas futures contract that trades in units of 10,000 million BTUs. The NYMEX also offers a smaller miNY natural gas futures contract for investment portfolios. The miNY contract trades the equivalent of 2,500 million BTUs of natural gas or 25% of the standard futures contract.

Economic indicators suggest that the worst of the recession may be behind. Suggesting pickup in manufacturing activity, the Institute for Supply Management's manufacturing index has exceeded the 50 threshold for two straight months. A turn in the U. S. economy for the better should spur industrial demand and help strengthen the price of natural gas.

For long-term investors, pullbacks such as the one seen today provide attractive buying opportunities to get in fairly close to the ground floor. Investors looking for bundled products can average into vehicles like Fidelity Select Natural Gas (FSNGX) or First Trust Advisor's ISE-Revere Natural Gas (FCG).

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