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.