NG trade

Natural gas continued its climb the first couple of days last week, with November futures reaching over 5.30 and the December futures reaching over 6.00. At those prices my contracts were down $1400 and $2500 respectfully. Finally prices began descending Wed, Thurs, and Fri.

On Friday, my November contract almost touched my break-even price of 4.75. With only Monday and Tuesday left before expiry, I decided to sell at the end of Friday at 4.81, for a small loss of $150. I didn't want to risk holding over the weekend, just in case prices went up. (Remember, even a 0.20 rise would be a $500 loss).

Today (Monday), prices continued their decline with quite a large drop. November closed down 27 cents at around 4.50, with 1 trading day left. So if I had held on just one more day, I could've turned a $500+ profit. Oh well, things could have gone much worse, so I'm happy getting out when I did, considering where things were at just a week ago.

The drop was nice because now my December contract is down to 5.20. I had planned on taking a large loss on it, but who knows, it might actually go under $5.

Anyway, after this trade, I think I'm done with trading pure futures. Too risky and too stressful. I know, I know, I only made 1 trade. And I'm glad it didn't go exactly as planned, or else I may have fooled myself into thinking it was easy money. But all is not for naught! The setting up of my OptionsXpress account was all part of a larger plan to eventually reach my trading destiny, which I am now ready for... and I'll leave that for my next post.

NG Update

It was a bit of a scary week with all the cold weather. Natural gas spot price kept going up, reaching 4.25, but the November futures kept bouncing off 5.10 or so. Luckily, last Thursday's Storage Report showed a larger-than-expected 69 bcf net increase in stocks, reaching a total of 3658 bcf for Oct.2, which I think helped keep the ceiling on the futures price, as I had hoped it would do.

I've been watching the weather forecast all week, here: http://www.weather.gov/forecasts/graphical/sectors/conus.php?element=T

(Turn off "Table Mouseover Effect", click +12 hrs if necessary to show "High" Temperatures", click the word "High", then use the "Next Image" buttons at the bottom to view each day's forecast up to a week ahead).

A week ago you could see that the cold weather would end around today (Wednesday), which turned out to be correct, and now for the next week it looks like it will be much warmer.

Natural gas prices have dropped quite a bit the last two days. Spot price is now at 3.80 and November price is 4.44. People think the drop was primarily related to news that UNG will begin to move its investments out of futures to other instruments due to anticipated regulatory restrictions and position limits on futures trading. See this article for more details:

http://online.wsj.com/article/SB125544223957682433.html

The weekly storage report gets released tomorrow (data is for the week up to Oct.9), and it should show the total stocks are above 3700 bcf, which I think will scare people.

Looking at the detailed historical data provided by the EIA, storage usually tops out between Oct.25 and Nov.16, most often right around Nov.7. I'm predicting that this year's storage will probably top out around 3900 bcf, based on historical patterns and extrapolating for this year. If this happens, certain regions will likely reach their maximum capacity and not be able to take any more natural gas.

So the fundamentals look perfect for a further drop in natural gas prices over the next couple of weeks... at least to me. However, all the trading reports I have access to on OptionsXpress keep saying everything looks bullish, there is strong support, prices are set to rise, etc.

Weather

November natural gas has still been hovering around $5 (good thing I didn't sell more at 4.70!). Spot price is now up to $3.20.

What worries me is a cold weather front that will be moving through the northern states over the next week or two. Temperatures are expected to be much colder than average. This could really push prices up a lot.

Hopefully the natural gas storage report released on Thursday will help keep the spot price from shooting up too much. Also, next week UNG supposedly has to start rolling their November contracts into the December ones, and the shorts are hoping that this will force the November contract price down.

Natural Gas - no new trade

After some research, I've decided it's not worth the risk to enter into any new NG position.

The commenter on my last post prompted me to look into the price action history for the last 2 big spread spikes seen in the graph. These details can be found in the historic weekly EIA updates (see here: http://tonto.eia.doe.gov/oog/info/ngw/historical/ngwu_2006_07.html).

Well, it turns out that right after the $1.50-$2 spread back at the end of September 2006 occurred, the spot price rallied $3 over the next month! Spot went from an average of about $4 to over $7, while the Nov Future went from about $5.60 to over $7 as well (actually expiring below the spot price). There was no major reason stated for the increase other than cold weather.

For the 2nd largest spike, in Nov 2007, this time the spot price didn't really move at all, and the futures contract did come down over $1 to close the spread.

I've been reading a bunch of message boards and it's amazing how split the view is on what the November futures are going to do. A lot of people actually think it will go up and close in the $5 to $6 range. And of course a lot of people, like me, think the price will have to drop. Another big topic is UNG, which controls a large percentage of natural gas futures, and there seems to be a lot of confusion on how they are affecting the market. I think there is a lot of manipulation going on.

I've decided not to sell another contract because:

a) The market knows best - Nov must be $4.70 for a reason. In 2006 the market was right.

b) There is a lot of uncertainty in what the price will do; there are a lot of people on both sides of the fence.

c) Colder weather is expected next week.

d) I calculated that I could only handle about a $1 increase in the futures prices if I sold another contract. No trade is worth the risk of getting wiped out over such a small move. Currently I can weather a $2 increase in futures price (which would probably require a $3-4 increase in spot price - in 24 days).

I still think Nov will easily drop below $4. Even with colder weather, the latest economic news shows the demand isn't there, and storage is at record highs, so I can't see a repeat of 2006 happening. But whatever, I'm just going to play it safe and be happy with the small gains I'll make if I'm right. And if I'm wrong, at least I shouldn't lose my shirt.

Natural Gas Insanity

Yesterday (Friday), the natural gas spot price dropped a whopping 60 cents from 2.92 to 2.32, a 20% drop. And what did the November futures contract do? It went up 25 cents! All futures months went up. This is insanity.

Over the last week the spot price has dropped over a dollar, while the November futures contract hasn't moved. With the Nov contract closing at about 4.72, this has resulted in a $2.40 spread between the spot price and near-month futures contract, which by the way has only 25 days left until expiry.

Here's a graph I found showing that this is the largest spread in over 3 years (and I bet even longer) - check out our spike on the right:

Image source: http://graphics.thomsonreuters.com/109/US_GASSPREAD1009.gif

Link is from this article: http://www1.hymarkets.com/html/news/2009/10/2/1254509240nN02332141.html

I've been scouring the latest news stories & blogs, and no one is offering any real explanations. They're all basically saying, "wow, there's a crazy spread" and that's it.

This premium cannot last another week, so it seems like an opportunity of a lifetime to make money. When the markets open Sunday evening, I'm going to try to sell another Nov e-mini contract -- or two -- at anything I can get above 4.50. I doubt it will fill because the price will likely open lower than that.