Sun 24 Sep 2006
As I’ve noted in the past, Natural Gas has been trading very low lately for a variety of reasons. With a seasonal pattern of bottoming in September, I’m interested in looking at how to invest in the potential upside of this essential commodity.Importantly though, my view of the futures market for Natural Gas is not very accurate… Not surprising, you need to look at the other futures contracts, not just the most commonly cited front-month.
When you look at the other futures contracts, you will notice that the prices are in cantango, which is not a big surprise when you think about it. Here are the prices from Friday:
- October – $4.7
- November – $6.0
- December – $7.3
- January – $7.8
Quite predictably, the participants in the Natural Gas market don’t expect NatGas to fetch a sub-$5 price come winter time. If I were to try and take advantage of the $4.70 price today expecting it to go up, the only way I could get it is by buying the October contract, which happens to expire September 27th (3 days before the delivery month). Not exactly the long-term play I was hoping for.
Of course, I can always consider buying one of the other contracts for this winter, I just can’t get that bargain price of $4.7!
I like to have plenty of choices, so what are my other choices? I can wait for a Natural Gas ETF to show up, but that may take a while. I can invest in XLE (Energy Sector ETF) and take the performance of the rest of the Oil and energy sector with it. I can buy some of the primary natural gas producers like Chesapeake (CHK) or Encana (ECA) or root through the rest of the sector to try and find some other similar producers — although they may trade more in line with the broad stock market than the natural gas price…
Luckily, I should have some time to think about it. The current trend is down, and with predictions of El Nino, we could see a warmer winter. Mix in a recession/slowdown in the economy, and the upside may not be as explosive as I might have expected… I’ll be watching for the trend to change direction, and then reviewing my options.