Tuesday, February 25, 2014

Are We Finally Reaching A Top In Natural Gas?

Natural gas tumbled more than 11% in Monday trade, with the front month March contract finishing at $5.445 / mmbtu - its biggest one day fall in more than six years.

This is poised to be an interesting week for natural gas - especially for the March contract - as it expires on Wednesday.

The latest NOAA 8 to 14 day outlook is still pointing to large areas of the central and eastern U.S to have below average temperatures, however the forecast is beginning to look a lot more mild.

As it stands I'm currently short the Jul14/Sep14 spread and continuing to hold, looking for a move lower.

My thinking here is that we've basically seen all natural gas spreads get pushed out well above what we might expect historically for this time of year.

That said, supplies are at a record deficit of 34 percent to the five-year average so it's certainly not unjustified.

However markets by their very nature do tend to overshoot the mark as they seek out a fair price. The main problem being the fact that we have the potential to get stopped out in the process and miss the entire move.

As a result I think the best course of action for those looking for some exposure to the potential drift lower is to take a trade in the less volatile shoulder months (May–June and September–October), to hopefully avoid any potential carnage and give us the best risk/reward we can.

I would certainly avoid the front months at the very least.

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