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Natural Gas Futures Trading: Opportunities for Both Shorts and Longs

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).

 

Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes. 'Sector funds are too risky.' 'I doubled my money with Fidelity Select Technology in 12 months!' 'Avoid sector funds.' If all of this sounds confusing, you are not alone.

Sector Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.


New ETF and Mutual Fund Recommendations

The Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 15.3% and 18.5%, respectively since 1994. The model portfolios were repositioned with new mutual fund and ETF recommendations on Thursday, December 31. Learn more about AlphaProfit's Free and Premium Service investment newsletters.



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