As cold weather arrives, is natural gas poised to pop?

After last year's warm winter, here are 3 ways to take advantage of a chillier season.

By Minyanville.com Jan 2, 2013 1:55PM
Snow copyright CorbisThis past year was dominated by inclement weather that left United States Natural Gas Fund (UNG) reeling; natural gas futures have been all across the board. 

Despite making an impressive 70% run during the summer, this commodity still managed to end the year with losses topping 20%. With this past year set to be one of the warmest (if not the warmest) in U.S. history, it should come as no surprise to see the commodity struggle, as the winter months are key for demand and consumption.

As such, this winter will be especially crucial for natural gas, as prices are already low. Some analysts have even predicted prices will flop to virtually $0 in the coming months and years as the supply for this fossil fuel continues to grow. Thus far, this winter has been something of a bust. Though the season technically began in the end of December, the first few weeks of the month saw warmer-than-average temperatures, keeping pressure on UNG and NG-related products alike.

But the past few weeks have seen falling temperatures as well as snowstorms throughout the country, so it looks like we may be in store for a winter season that falls more in line with the average rather than last year's unusually warm stretch. Colder temperatures will mean more demand and use of NG-powered appliances in the home, typically for heating. This will decrease supplies and potentially raise prices for the battered commodity. Should this winter shape up to be a cold or even average season, NG stands to gain back some lost ground from the same period last year. Below, we outline three ways to take advantage of a colder season in the coming months.
  1. United States Natural Gas Fund: Though this fund has struggled to accurately track NG’s returns over the long term, it is easily one of the most liquid and effective trading tools on the market. This fund measure front-month natural gas contracts and is a perfect fit for any trader with the time to keep a watchful eye on this volatile but potentially rewarding fund.
  2. 3x Long Natural Gas ETN (UGAZ): This 300% leveraged fund is not for the faint of heart, as it is not uncommon to see UGAZ move by 5% or even 10% in a single session. This trading tool is designed for those who truly understand the risks involved, and it can provide some massive returns in an NG bull market, but this process works in both directions.
  3. ISE-Revere Natural Gas Index Fund (FCG): FCG makes a play on the production side of things so it should be considered an indirect investment. The fund is comprised of 30 or so companies that derive a substantial portion of their revenues from the exploration and production of NG. If NG prices rise, you can bet this basket of producers will surely benefit.

Note: This story originally appeared on CommodityHQ.com.


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1Comment
Jan 3, 2013 10:39AM
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Prices will be soft until LNG exports and Nat Gas fired electrical plants start taking up the excess.
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