Question:
I’m new to trading, but I think natural gas is cheap, and it almost has to go up. How would you play this market?
Newbie from Tradertown
Answer:
First off, as a “new” trader” I would be careful about trading futures. Even seasoned traders will tell you this is risky business. But, if you want to do it, get to know your market intimately. The excerpt below demonstrates the point I am making.
Trading Natural Gas
The NYMEX Division natural gas futures contract is widely used as a national benchmark price. The futures contract trades in units of 10,000 million British thermal units (mmBtu). The price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits.The spread between natural gas futures and electricity futures called the spark spread can be used to manage risk exposure in the energy markets. Two financially-settled natural gas (HH & HP) contracts are available for trading on the CME Globex system and clears through the New York Mercantile Exchange clearinghouse. The HH contract settles on the same date as the physically-delivered NG contract and HP is a penultimate contract. Both contracts are listed for 72 months. The NYMEX miNY™ natural gas futures contract, designed for investment portfolios, is the equivalent of 2,500 mmBtu of natural gas, 25% of the size of a standard futures contract.
As to how I would play this market, well, I wouldn’t, at least for now. Here’s why. I never jump on a bandwagon. Here is a statistic taken from a June 25, 2009 article in BusinessWeekabout this very subject.
They’re piling into the simplest form of a pure play on gas prices, the U.S. Natural Gas Exchange-Traded Fund. Assets in the fund, which invests mainly in gas futures contracts, have gone from less than $700 million in February to more than $4 billion in June.
So far, this “bet” has not paid off because …
Soaring production combined with declining demand from power plants, factories, and other industrial users has left storage facilities with near-record levels of natural gas in inventories.
This could change, of course, and it might become a money making play, but until you are solid with trading futures, and the market conditions change, I would find another good play.
