Trading natural gas in 2023.
After last year's roller-coaster ride, 2023 could be boring but still profitable.
A monthly view of NG prices suggests that the craziness of last year is likely over. After the blow-off high in 2008, prices fell hard then ranged for 11 years.
Last year was chaos compared to the steady climb and fall in 2008. What can we expect for 2023? The hard rally in 2009 was in September and topped out in January, 2010. Surprisingly, storage levels were also high at that time, +17% from the 5-year average in September. By January, 2010, storage was +4.4% from the 5-year average. So why did prices rally so hard? Maybe just a hangover from 2008.
The price spikes in 2013 and 2018 were both late in the year and we got a price rally in November 2022. Can we expect a price spike in 2023? If so, what will trigger it and how high can the price go?
NG is currently back near support, but it could just continue a slow slide, with a spike higher when weather turns cold and Freeport comes back online. NG made a low of 3.38 last week, so a spike to 4+ or 4.50 is possible, but likely not much more. If the weather across the U.S. remains unseasonably warm, the price could fall to 3.00 or lower, but it’s becoming increasingly difficult to play the short trade with KOLD. After a huge run of 213% from the low on December 13, it’s perhaps time to take your winnings and go on vacation.
I show Greg’s trades as a point of reference, so I, and others, can learn from his experience. He has consistently made large profits trading NG over the years, but I have always questioned his strategy of building a large position while moving deeper underwater.
In early November, I wrote about “The wacky world of natural gas!”, suggesting the price was likely going lower, but advised caution since it could make a surprise move up, which it did for all of November, hitting 7.50 late in the month, then falling hard to 5.50 in early December, back up to 6.87 on Dec. 13 before finally starting an extended drop.
Clearly, holding KOLD for a full run to where you expect NG to be priced is not a good idea. I also wrote in November that “Simple math paints a clear picture. Compounding returns should be your focus.” The potential compounding returns in KOLD and BOIL in 2022 were astounding, as they were with UVXY for the first 6 months. I suspect that both will be much quieter in 2023, but in the first 2 weeks, the KOLD/BOIL combination gave an actual gain of 74% trading just half the allocated capital, so nearly 150% on traded capital. Buying at the Jan. 4 low of 30.00 and selling at the high of 41.96 on Jan. 11 provided a gain of 39.9%. You can decide for yourself if it’s worth the effort to trade, and it will also depend on how many zeroes you have on your trades. Greg typically has 3 zeroes with a million dollars in capital available, willing to double that if he gets underwater and believes in the trade.
Since the first 2 weeks were exceptional, compared to what I expect for the rest of the year, I will reset the trade and see how it works out going forward. You can decide if you want to trade it as well and with how many zeroes.
Week 3, Jan. 16-20: If you took the week off, you missed a nice run in KOLD from the low open on Monday. I took the gamble, holding BOIL over the weekend and sold for a nice 11% at the open and bought KOLD. You may have noticed that the initial moves are almost always against the gap, so I like to put in market sell and buy orders pre-open, then watch closely and put in stop orders. Simply holding KOLD all week and selling late on Friday gave a gain of 25.8%. Pretty good for doing nothing. Trading could have given a gain of 38%. That’s not a lot extra for the extra effort, but there was no way of knowing in advance that NG would continue lower all week.
I was surprised by the reversal on Friday after midnight and was expecting a gap lower based on Thursday’s late in the day drop. I was also on the sidelines, not knowing what to expect and happily locking in a 16.4% gain on Monday’s opening buy. Friday’s KOLD buy after selling BOIL for a small gain or breakeven was simply following the price action and sticking to a system that has been working effectively for months already. Holding BOIL as NG continues lower and lower, waiting for the weather to turn cold, is really not a good investment strategy.
I did get a bit distracted this week, expecting a move in BOIL, which seemed reasonable given the low price for NG, but it could still go a lot lower, so best to continue to sell for small gains or breakeven if it doesn’t make the move up.
I’m on the sidelines this weekend, not wanting to gamble again with BOIL and definitely not wanting to hold KOLD and risk losing my gains.
Week 4-5, Jan. 23 - Feb. 3: It started out well for the bulls with NG and BOIL up on Monday, Jan. 23, fell from the open so you would have sold, locking in gains, then it reversed at noon for a good trade. Tuesday you would have sold early as it fell and it was mostly downhill after that.
Psychologically it’s difficult to stick with a trade that is up over 200% in a month and you’re wondering just how much lower the price of natural gas can go, but if you ignored those issues and simply stuck to your trading strategy, then you could have easily caught the extra KOLD gains and stayed in the trade.
I’m on the sidelines again this weekend after taking a trade with BOIL. There’s just no reason to incur the risk from holding as it would then throw you off your trading game if you wake up Monday underwater. We’re definitely nearing the bottom for NG, but it can just as definitely go lower, so caution is important.
Tues. Feb. 7 update: Monday opened about even to Friday, bought, sold, bought again at 2pm, or could have held from opening buy. I sold late Monday, just to be safe, then re-bought off the open on Tuesday for the same price. At 10am, I sold for a gain of 16.9% (5.75 > 6.72), bought KOLD and sold it at 11:15 for +7.5% and re-bought BOIL at 6.32. I sold and re-bought later in the day, again, just to be safe, but the price action is showing strength for the first time in weeks. I held at the close and will look to buy more if it opens lower and reverses tomorrow. Basically, this is just a shout out to say NG may have finally started a move up.
Update to Fri. Feb. 17: NG did indeed start a series of higher lows after the Feb. 3 low of 2.34, hitting 2.36 on Feb. 8, down hard from 2.66 and the first time that it didn’t make a lower low within 3 days. The pattern repeated the next 3 days hitting 2.61 and falling hard to 2.38 on Feb. 13. Hard up to 2.62 the next day, Feb. 14, and then it was down for 3 days, breaking support on Friday.
The strategy was to be aggressive early in the day and cautious late, so one shouldn’t have been holding BOIL on Thursday and wouldn’t have suffered a loss with NG dropping sharply overnight. The first week gave two BOIL trades for +14.8% and +11.9%, plus a KOLD trade for +12.0%, bought and sold on Feb. 8.
The safe play was to sell late on Friday, Feb. 10, especially remembering all the big gaps in January from strong rallies. JC went long on Feb. 9 at 5.85, but his method isn’t as effective with BOIL. On Monday, Feb. 13, you likely bought early, sold, then bought again at 2pm and held given the strength being shown since the Friday, Feb. 3 low. It then made sense to sell late Feb. 14 and lock in a gain of 11.9%. After hours, JC commented: … Therefore, you would purchase 1st batch tomorrow, especially under today or -1ATR. After purchase, will ascend to hurdle at EMA20 for 1st selling (< $8.40)
... then final destination to R5+ or +k (maximum at < $10.20).
On Feb. 15, it made sense to buy BOIL early and then sell when the rally failed. It was a good chance to buy KOLD but not easy to do with the focus finally shifting to BOIL with an uptrend now in place and JC also with a position and predicting a move higher. Part of his plan is to buy more cheaper, so he doesn’t mind going underwater. I do, so I prefer to sell for a small gain and wait for a more opportune time to go long again, likely when JC is buying another batch.
Feb. 16 confirmed the weakness and the trendline was broken. Holding KOLD overnight was a reasonable bet and it would have paid off with the gap lower on Friday. You could have squeezed some extra on the day and sold KOLD at 2pm for a gain of 25.0%. That’s a total of 50% on the week and +588% YTD. Compounding returns are clearly performing their magic and NG is providing the frequent swings to make trading the most effective strategy.
A good question to ask yourself, is do you want to continue with a strategy of buying and building a position as the price continues lower. For me, I prefer to sell off the high on Feb. 16 and be willing to re-buy if it moves higher on the day or gaps higher the next day. JC (and others) didn’t take the 12.8% gain on Feb. 10, and repeat the following week. He also missed a 25% move in KOLD, waiting to buy his next batch of BOIL or sell his first batch at < $8.40 (+43.6% from 5.85 buy). Trading on the week yielded a net gain of 50% this week (and every week this year) and I’m waiting to buy BOIL with the current price 12.5% below JC’s 5.85 buy and hold.
Week 8, Feb. 21-24: Monday, Feb. 20 was a holiday, but NG still trades and was up a bit from Friday, so I was thinking it was bad luck that I didn’t gamble and hold some BOIL. By Tuesday morning, it was a completely different story, with NG dropping hard from 2.34 at 6am (Friday low 2.22) to 2.18 by 10am and bounced around there the rest of the trading day. With BOIL way down at 4.40 (-24.8% from JC’s buy), I had no desire to buy and hold BOIL or hold KOLD overnight. The weather was turning colder across the U.S., so there’s no way to explain the hard drop on Tuesday, but $2 NG was clearly a possibility, regardless of fundamentals.
NG hit a low of 2.11 at 2am on Wednesday and then powered up to 2.42 by noon. Clearly the big traders were pushing the price around. Regardless, they created great opportunities for small fish to feast.
It’s important to note that with NG back to the level it was at on Feb. 14, BOIL is only back to the level you bought, 5.90, not the level you sold, 6.63 (+12.4%), and that was from less than 2 weeks. It’s also good to keep in mind what the ‘big fish’ might be planning. Clearly, they smashed the price down so they could buy cheaper. Now, they may or may not want to push the price higher. As a small fish, I prefer to grab what’s available during trading hours and not get swooped up by a drag net overnight.
With storage now 15% over the 5-year average, prices could easily go back to $2, so taking trades with both KOLD and BOIL will likely continue to be profitable.
Here’s a quick summary of what was possible so far this year trading cautiously. First 2 weeks, +73.4%, which I thought was going to be exceptional. It turned out to be the norm. Week 3, +39.8%, YTD +139.9%. Week 4-5, +117.3%, week 6, +67.3%, week 7, +47.3%. This past week, +45.5%, YTD +755.2%. Such is the power of compounding returns. It’s now up to each of us to decide what steps to take going forward.
Week 9, Feb. 27 - Mar. 3: NG gapped higher on Monday and powered up all week to close +42.7% from the low on Feb. 22. If you want to believe that fundamentals or cold weather or the tooth fairy caused this move, you’re free to believe what you want to believe. If you believe NG will continue to $5 and higher based on fundamentals and hot weather this summer, okay, but I’m doubtful. The key to success and profits remains the same as before: ignore your biases, trade what gets presented each day and don’t take unnecessary risks. Going long NG with BOIL since Dec. 28 was a bad idea as it fell almost daily and held up no more than 2 days. Why buy when it’s likely to be cheaper within 3 days?
In my update after Fri. Feb. 3, I wrote, "I’m on the sidelines again this weekend after taking a trade with BOIL. There’s just no reason to incur the risk from holding as it would then throw you off your trading game if you wake up Monday underwater. We’re definitely nearing the bottom for NG, but it can just as definitely go lower, so caution is important." On Monday you could have bought BOIL at Friday’s price and safely ride it up on the day. On Tuesday, Feb. 7, I wrote, "Basically, this is just a shout out to say NG may have finally started a move up." The next day was the first higher low of the year.
These updates are useful for me to maintain clarity and keep me ready in advance of what might be coming. I hope they’re also useful to others. There was then no need for me to tell you, as I later wrote, "Feb. 16 confirmed the weakness and the trendline was broken. Holding KOLD overnight was a reasonable bet and it would have paid off with the gap lower on Friday." Buying BOIL on Friday Feb. 17, the day after it broke the trendline was simply a bad idea and very risky. Buying on Tuesday, Feb. 21 after the holiday Monday was still risky but 13.9% cheaper than buying on the prior Friday. Buying on Wed. Feb. 22 off the open at 4.70 missed a gain of 8.0% from the previous day’s low, but still cheaper than the risky buy on Friday. Holding to Friday March 3 close of 7.86 has you up 67.2%. I sold out at 7.80 prior to it reaching a high of 7.96. I prefer the safety of the sidelines after such an extreme move.
Some may suggest buying KOLD and holding it after such an extreme drop, but remembering BOIL after Friday Feb. 17, there’s no reason to take that risk. Next week, simply be ready to take advantage of opportunities in both BOIL and KOLD. (spoiler.. you would have gotten a great gain buying KOLD late on Fri. March 3.)
I decided to do a closer review of my trades in the past week plus, and in some ways, I over traded, because I didn’t believe in the NG rally and was expecting a reversal. Buying off the open, against the gap, remained a good strategy, but on each day I took the gain, bought the opposite and closed it out, not wanting to take the risk of holding overnight. Limiting yourself to one trade each direction on the day seems reasonable and has you positioned to catch the turn when it ultimately comes. NG may continue up to 3.60, so be willing to go with BOIL, even if you’re a bear at heart and waiting for a big chance with KOLD. Be patient. It’s better to be late, than early.
Update to Mar. 31: After such a big run up in NG in such a short time period, it made sense for a pullback. As it turned out, the entire move was BS and NG fell ‘steadily’ for the next 4 weeks.
Has it bottomed now? Maybe, and I decided to hold a small BOIL position over the weekend, but it can go lower. Greg finally took the loss on his BOIL position, started on Dec. 28 and then switched to KOLD, which he is holding over the weekend.
This coming week, maintain your strategy to buy early for a trade in either direction and don’t hold for a loss if it turns against you.
Update to Good Friday: Well, Greg won the gamble holding KOLD over the weekend, and I lost holding BOIL, which is why I don’t recommend gambling, especially when the trend is still down. Take the win when you have it and remain patient. From the gap lower on Monday, NG showed some strength but was crushed on Thursday after a ‘bullish’ report with excess storage dropping for a third week in a row, down from +23.7% to +19.5%, which is pretty significant. Clearly, the big money wants the price lower before they swing the price to the upside.
The strategy of buying early for a trade in either direction paid off nicely with KOLD on Wednesday and Thursday. Focusing on the inevitable long trade with BOIL, trying to be in at the bottom with it, has you nursing losses, especially if you didn’t sell on a stop.
I stubbornly took the gamble again to hold BOIL over the long weekend. Greg did the same, buying on Thursday, 50k x 3 at 3.27, 3.16 and 3.06, all while falling, low 2.96 at 2:15, close 3.03 (-11.66%). He also bought KOLD pre-open and sold at 78 for a gain of 4%. That had him missing out on an extra 9.6% with KOLD as it continued up to a high of 85.58. Sure, the move in NG made no sense, which is exactly why it’s best to stick to the simple strategy of buying early and holding with a loose stop so you can catch the full move.
While sticking to the trading strategy for now, it’s also good to be watching for the inevitable reversal. With NG at $10 last summer, the drop was inevitable, despite all the bullish forecasts. Patiently waiting and catching that reversal was not easy. Patiently waiting and catching the reversal to the upside now will also not be easy, so here are a few thoughts.
Other than 2020, NG has only dipped to $2 briefly in 2012 and 2016. From 2010 to 2021, coal ranged from $128 in Feb. 2011 to $50 in Feb. 2016. It went back to $120s by 2018 and back to $50 in 2020, similar to the past 2 lows in NG. In 2020, oil went sub $20 and even hit -$40 one day on a contract role, so low NG prices in 2020 with excess storage was completely reasonable.
The maximum excess was reported on April 16 at +21.4%. This year the maximum excess was reported on Mar. 16 at +23.7%. Surprisingly, NG prices have continued to fall this year, versus rallying in 2020. Storage excess has continued to fall, reporting 22.7%, 21.0% and 19.5%. That’s a positive sign. Another positive factor is the current price of coal at $194, down from $430s last summer. Is it reasonable for coal to be much higher than highs of the past 10 years, while NG is back to the lows? Surely that would encourage a LOT of coal to gas switching for electricity production, ignoring the huge environmental impact as well.
Last weekend I commented to Greg: I'm trying to see some justification in the wild price swings for NG but there really isn't any. If you look at the uses of NG, www.eia.gov/... the biggest by far is electricity and industrial, and they're not impacted by weather. They also don't change suddenly. According to the chart, residential and commercial use (heating, etc) have been flat since the mid 1970s. The consumption chart, ycharts.com/... shows a repetitive annual pattern back to 2019 with somewhat higher summer consumption last year, but certainly not enough to justify a price increase to $10. Gas storage is almost always within the 5 year average range and whenever it gets near the upper or lower limit, it pulls back. We'll never run out of storage or gas. This chart presents a different view. ycharts.com/... (click to 10Y or MAX time frame).
The BIG difference in 2020 was the drastic drop in exports, ycharts.com/... which continued till June. NG price hit a low of 1.43 on Fri. June 26 with excess storage jumping back to 18.3% from 16.9%. It has held a rising trendline since then and was only broken in December 2022. Exports are still up this year and with the low prices, consumption should remain high for electricity and industrial. With the cost of everything way up, including drilling and production costs, can NG really fall to 1.60 without a crash in exports like in 2020? Or a sudden end to the war in Ukraine? But that doesn't impact US supply and demand, so shouldn't impact prices, but it would.
It seems to me that prices, based on fundamentals, should meander around a range that gradually increases keeping up with inflation. Traders use weather and other news events to swing prices beyond all logic. This was also interesting: The five largest natural gas-consuming states and their percentage shares of total U.S. natural gas consumption in 2021 were: Texas 15.2%, California 6.8%, Louisiana 5.9%, Pennsylvania 5.7%, Florida 5.0%. I wonder what percentage is for heating versus electricity and industrial.
Those are some extra thoughts to keep in mind longer term while continuing to follow the basic trading strategy and waiting for a run up in NG. Remember the move in March, how sudden and severe it was, so be ready and willing to jump in hard early with a stop. And with Greg buying 50k shares a pop, there’s no reason to build up to your full position which is likely way below $150k. Going all in and all out will keep you safe from going underwater and on board for a bigger move.
Update to Friday, April 21: Trading the range continues to provide the best returns.
I’m focused on BOIL thinking NG is undervalued. Greg remains focused on KOLD but did well trading both for the first 2 weeks in April. On April 6 he was early selling KOLD and buying BOIL, highlighting the need to stick with a trade that’s going your way. On Friday, April 14, he chose not to buy BOIL and then re-bought some KOLD. That can easily happen when you have a bias as to what direction you think a market is headed longer term. I’ve been guilty of the same, re-buying at a discount and then stuck as it falls further. The above charts clearly show a range so simply trade it until it breaks out of the range.
Here’s a chart of the Dutch NG futures. I suspect a tulip chart from back in the day would look similar.
Update to Friday, June 9: The up and down moves continue but the daily action is now more subdued, except for a crazy swing right after the report on Thursday. I bought some UNG to hold over the weekend since I didn’t want the risk of holding BOIL but think NG may have bottomed. I thought it may have bottomed in early May as well, yet it fell after the rally to a new low June 1.
I use investing.com charts to show movement on the day, but you need to remember that it is continually rolling into new monthly contracts so doesn’t properly show things on a daily basis.
Notice the decay in one month, so I don’t like holding BOIL (or KOLD). I will try to catch a sharp move on the day with BOIL and then hold it.
Update to Friday, June 16: The bears prevailed over the weekend with NG lower on Monday, June 12. The open was a good chance to go long with BOIL but it reversed after 10am and you had to sell for a small gain. It was imperative to respect the downside risk given the large drop in late May, and all year for that matter.
I firmly believed that NG was undervalued, so re-bought some BOIL on Monday when it held. Tuesday gapped higher and fell, so I sold all my BOIL and UNG from last week. Tuesday and Wednesday were incredibly flat but I did re-buy a small BOIL position. Thursday gapped higher and I sold as it fell for the first half hour and re-bought when it reversed at 10am. I then forgot about the report at 10:30 and didn’t have stop buys in to catch a sudden move. They probably wouldn’t have executed though since the move was so sudden. In hindsight, I should have had more conviction that the low was in June 1 and loaded the boat on Monday, June 12. Oh well, that’s what makes trading NG so difficult. It’s likely to pull back in price next week, but I’m not gambling either way. History shows its tendency to change direction over weekends, so it’s very likely to open lower next week.
Greg bought KOLD pre-report on Thursday and then said, “I stupidly forgot about the NG Inventory report and should not have bought before it came out.” At least I was holding BOIL and forgot. He added later, saying “I added another 5K KOLD at 65.36, I think this move is a bit over cooked!” He didn’t add on Friday. I would have sold my first buy as soon as I saw the drop, either at market with a stop buy higher to catch a reversal, or with a stop if it had already bottomed and was holding.
I can’t imagine a big jump higher in NG next week, but it could drop a lot, so buying KOLD late Friday and holding is probably a decent bet. I bought and sold for the small gain.
Update to Friday, July 14: NG low was indeed June 1 and my ‘prediction’ Friday, June 16 was only accurate for a day with a hard move on Tuesday after holiday Monday. After that, NG pushed higher and KOLD fell all week. Greg is still holding and expecting NG to go lower. (5k x 3, 72.00, 65.36, 53.68, ave. 63.68).
I have continued to trade, but it’s been difficult with many sharp, unpredictable reversals. I’m still biased long, feeling NG is still below the cost of production, but caution is advised. Decay is still significant.
Update to Friday, July 28: UNG opened lower on Mon. July 17, but held Friday’s low, so it was reasonable to buy UNG or BOIL and hold overnight. It gapped open higher on Tuesday and held mostly flat through Wednesday. Best to stay long, risking your gains and then ‘lucky’ to catch the gap move higher on Thursday. At 1pm it reversed suddenly so you would have been stopped out and then checking to see what caused the sudden move and whether it was likely to continue.
Greg remains bearish and added 2k shares of KOLD on July 18, 20 and 25. He could have sold on Thursday, July 27, but he’s simply building an ever larger position, believing NG will fall to $2 and possibly even lower. I remain doubtful and will continue to trade the ‘extremes’. That’s been an 8-10% range with UNG and 15-20% with BOIL and KOLD. I’m on the sidelines not wanting to hold either at mid-range over a weekend.
I was waiting for 2.80+ NG to place a larger bet with KOLD and am still nervous taking a large position in BOIL with NG at 2.50, especially with Greg saying it’s going to $2. I’m also surprised that NG production hasn’t dropped off at all, even with the reduced rig count. So, remain cautious and nimble if you’re still trading NG.
Update to Friday, Oct. 6: NG took off this week for no apparent reason. Looking back in time, it’s difficult to believe the current price will hold.
Holding UNG/BOIL or KOLD over the weekend is a gamble. Unfortunately I sold UNG a bit early and didn’t jump back on the rocket. I also bought KOLD too early but jumped off that elevator a few floors lower and avoided the basement. There should be a great KOLD trade coming soon.
Update to Friday, Dec. 1: I hope you managed to take full advantage of the KOLD trade. It wasn’t easy and a sharp increase in production fueled a huge run up in November, +86.5%. For me, I caught the early October move, then was pushed onto my back foot with the gap and drop late October. I was again long Fri. Nov. 3, but not aggressively and I sold on Monday, fearing another gap reversal.
In hindsight, I should have bought more on Monday, November 6. I was certain that NG was overpriced at 3.80 and should fall to around 3.00, and it did that, and then some!
That is indeed an amazing drop in price, but for me, what was more amazing was that the price held up so high for so long. The warm weather is partly responsible, but the main trigger was a sharp increase in production.
That’s a significant increase and if the warm weather persists, then the price of NG should fall further. Holding KOLD overnight and over the weekend at current levels is difficult, psychologically, but it’s actually less risky than holding UNG or BOIL. Eventually, there will be a great long trade, but it may be months away, so best to trade the moves on the day to be safe.
Update to Friday, Dec. 15: KOLD has now made an enormous run up of +164% in just 6 weeks! Now you’ve seen the trade potential if you catch a return to ‘reasonable’ prices, based on the fundamentals. And one could argue that the price has now gone well beyond reasonable. Given the forecasted warm weather and high production levels, NG could easily drop back to the low prices from last week and lower.
If we go back a year, the move in KOLD was even more extreme +213% in a month from Dec. 13 to Jan. 13, and that was just a pause, climbing +547% by Feb. 21. This was an extreme case because NG prices were excessively high and it was a very warm winter. Now, prices are somewhat reasonable and we don’t yet know if the winter will continue warm.
The February NG contract has fallen from 3.73 to a low of 2.19 and closed the week at 2.425. I’m not sure it can go much higher given the current fundamentals, but as you’ve witnessed, prices often get pushed to extremes. I took some good BOIL trades from the Wednesday low and bought KOLD on Friday at 96.00 (after buying twice higher and being stopped out for small gains as it fell lower and lower). We’ll see what Monday brings.
There’s no fundamental reason for NG to rush back to $3, so there’s no rush to catch a long trade with UNG or BOIL. Once a bottom is firmly established, then you can have a little more confidence trading both directions. Until then, buy low and sell high on the day, thus avoiding the risk of holding overnight.
Update to Friday, Dec. 15: KOLD pulled back some this week of wild swings. NGG (Feb. contract) repeatedly hit a ceiling of 2.50 (Monday, Thursday and Friday). I bought KOLD late at 97.00 and will be willing to buy much more if the opportunity presents itself next week. I don’t expect a big drop in NG so will focus on trading the 20% range for now.
Update to Friday, Jan. 5: Wow, I never thought NG would push up near $3 with the continued warm weather. The chart below shows just how ridiculous NG pricing can get. There was absolutely no justification for the price to be holding 3.80 or even above 3.00. It was simply a hangover from 2022 when prices went to an even more ridiculous $10. Falling 42% in 6 weeks was certainly extreme, but long overdue. Rallying up 32% in 3 weeks is again ridiculous, but it could easily top 3.00 next week.
So, how does one capitalize on these situations. Because of the large gap opens and wild swings, it’s not easy, but it is doable. Let’s have a look.
The key is patience and conviction. The sharp drop in early October made no sense given the high price of NG futures and the warm weather. There was no justification for NG to go back up to 3.80. When it rallied again late October, sending KOLD down yet again, now you needed conviction. I did buy on Fri. Nov. 3, but it could have easily gapped lower, not higher. Selling on Monday for a 13% gain was easy and the safe decision, especially given the gap higher the prior week and full gap lower the next day. But NG was near 3.80 so it had to come down and you needed to stay in KOLD.
I thought NG might bottom near 2.40, but patience was needed to stay in KOLD and wait for NG to truly bottom, often an overshoot of what’s reasonable. When it hit 2.18 a week later, now one could have confidence switching to BOIL.
The Friday rally from gapping lower makes absolutely no sense, except that there’s a winter storm in the forecast. There will need to be 2 months of cold weather to make a dent in the excess storage capacity. The report on Thursday, Jan. 4 should have sent NG lower, but instead it rallied.
See how the blue line headed outside the 5 year range. That is very bearish, yet the price of NG rallied. With production remaining high, some very cold weather is needed to bring storage back within the 5 year range. I don’t see that happening, so I’m psyching myself up for a large KOLD trade, remaining patient and hanging on to my conviction. Here’s a look at catching the turn long with UNG or BOIL.
Once again, I was looking to go long and was then caught holding a small UNG position from Fri. Dec. 8. Yes, it was a re-buy, cheaper than I sold, and I bought BOIL for leverage on Mon. Dec. 11 and sold late in the day for +12%, but my confidence and conviction had taken a blow. I bought and sold BOIL on Dec. 13 for 8.8% and sold UNG on Dec. 14 (bought Dec. 12) for 3.0%. On Dec. 18, having missed the extra move in BOIL/UNG, I bought and traded KOLD mostly after that. It was a good trading range and the gaps were in my favour since I sold and was then able to re-buy cheap the next day. The move this past week to start the year is completely ridiculous but still provided good trades with KOLD. Not so good if you’re holding, like Greg.
For most, being down $360k, -18.4% on a $2M bet would be pretty distressing. For Greg, it’s par for the course, and not actually significant. Last winter he started buying BOIL Dec. 28 and finally sold March, 20 for a $1.062M (-59.1%) loss. A year later, he was up $376k (by my records), so he knows he will be fine after this current trade, even if it ends in a loss. His breakeven price is 93.46, so it’s likely he will make a gain. The opportunity for you (and him) is to catch the 22.5% move back to his breakeven price. With nearly $2M already on the line, he won’t be adding a lot more. For anyone just starting a position, the Friday low was a good bet, but would include the risk of a gap lower on Monday. Going forward, you have all the information you need to make a safe, profitable trade with KOLD. Good luck!