Natural gas prices have a history of moving higher from August to December. But what are prospects this year?
Thackray’s 2011 Investor’s Guide notes that U.S. natural gas prices have recorded exceptional seasonal strength from Aug. 1st to Dec. 21st during the past 15 periods. The trade was profitable in 12 of the past 15 periods. Average return per period was 42.3 per cent. The sweet spot is from the end of August to the end of October. A word of caution, though. Natural gas prices are volatile. Returns during the past 12 profitable periods were substantial, but losses during the three losing periods also were substantial.
Seasonality by the sector is influenced by one minor and one major annual weather event that occurs each fall. The minor event is warm weather that increases demand for natural gas used to produce power for air conditioning. The major event is hurricanes entering the Gulf of Mexico that frequently curtail supply. The Gulf of Mexico is the largest gas producing area in the U.S.
This year weather forecasters are predicting hotter than average temperatures in eastern Canada and the eastern United States in the month of August. They are also predicting an increase in the number of Atlantic based hurricanes this year partially because of warmer than average temperatures in hurricane inception areas during the past few months. The National Oceanic and Atmosphere Administration (NOAA), a U.S. government agency, noted that the Atlantic storm season annually averages nine to 12 large named of which five to seven storm reach hurricane strength and one to three become major hurricanes. This year NOAA is predicting 12 to18 named storms of which six to 10 storms will reach hurricane strength and three to six storms will become major hurricanes. Natural gas inventories currently are in the middle of their historic demand/supply range for this time of year. The demand/supply balance easily could be disrupted if current weather forecasts prove to be true.
The direct way to invest is through ownership of futures backed Exchange Traded Funds that track the price of natural gas. Direct ownership is not for the “faint of heart” due to high price volatility. In addition, futures contracts and futures backed ETFs assume additional risk when futures contracts are in contango.
The most actively traded natural gas Exchange Traded Fund is the U.S. Natural Gas Fund . It attempts to track the spot price of natural gas in the U.S. Management expense ratio is 0.60 per cent.
The second most actively traded natural gas ETF in the U.S. is the U.S. 12 Month Natural Gas Fund . The fund is based on a basket of futures contracts that expire over the next 12 months. Management expense ratio is 0.75 per cent.
Claymore Investments offers the Claymore Natural Gas Commodity ETF. Units hold physical natural gas forward contracts designed to track the NGX Canadian Natural Gas Index. Management expense ratio is 0.80 per cent.
Horizons offers a variety of U.S. futures based natural gas ETFs that are hedged against U.S. currency risk. The Winter-Term NYMEX Natural Gas ETF is designed to track the NYMEX futures contract for the next January delivery. Management expense ratio is 0.75 percent. The BetaPro NYMEX Natural Gas Bull+ ETF seeks investment results equal to 200 per cent of the daily upside performance of the NYMEX natural gas contract for the next delivery month. The BetaPro NYMEX Natural Gas Bear+ ETF seeks investment results equal to 200 per cent of the daily downside performance of the NYMEX natural gas contract for the next delivery month. Management expense ratio for the Bull+ and Bear+ ETFs is 1.15 per cent.
On the charts, natural gas currently has a negative technical profile. Intermediate trend is down. Gas trades below its 50 and 200 day moving averages. Short term momentum indicators are oversold, but have yet to show signs of bottoming. Strength relative to the S&P 500 Index turned positive at the beginning of July. Preferred strategy is to wait until late August for technical signs of bottoming before entering into the seasonal trade.
The above chart represents the seasonality for Natural Gas Futures (NG) Continuous Contract for the past 19 years.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. Reports are available at www.timingthemarket.ca.