Why Did Natural Gas Spike?

Probably most commodity trading advisors know there is a glut of Natural Gas. We all know this from basic economics, the law of Supply and Demand. The fact is there has been a rising level of natural gas. Natural gas supply actually is standing at an all-time high. Put into context of the recession, demand has even weakened further, thus prices have been falling.

So one could take all of this fundamental knowledge and think they know where the natural gas market is headed. Sure… yet on the New York Mercantile Exchange on Friday, Natural Gas rallied about 25.2 cents, or 5.6%. This spike is enough to kill an unsuspecting commodity trader.

What is the reason Natural Gas spiked? It can be stated for numerous reasons, such as the economy is improving, or we are going to have a cool winter. Or simply that it just went up - anything can happen and it did. It probably hurt some traders in Natural Gas that were relying simply on fundamental analysis.

According to fundamental analysis this should not have happened. Regardless, this is what separates trend followers and long term commodity trading advisers. Trend followers have a plan and follow it with discipline.

Comments

[Freya:]

Its snowing out West, the Storm is headed East.

It Seems like an early start to Winter. NG will go up.

Oct 05 05:58 AM

[coastside:]

>> Trend followers have a plan and follow it with discipline.

So you're saying fundamentalists don't have a plan and don't follow it with discipline? I would say Warren Buffett has a plan and he follows it with more discipline than anyone on the market.

Natural gas went up because fundamentalists know that the rig count is hovering near its lows. Trend followers reacted when reports that gas storage was almost at capacity - and when the prices started going down they all jumped on board. The fundamentalists know that lower production will eventually cause a rapid drain down during the winter. And they will patiently wait for it.

Oct 05 09:27 AM

[Afamiii:]

Everyone is looking out for the bottom, because no one wants to hit it. IMHO the bottom was touched during the first week of Sep, of course I tend to be wrong up to 50% of the time. But I am trading the belief that, that was the bottom.

Regardless, costs are sitting at +$6 and prices are hovering around that (for July deliveries.) Supply (though not yet inventory) is dropping. At some point supply will drop below demand and prices will higher.

Is this the rally that will take us there? Who knows? If it is we will profit, if its not then we will try again the next time.

Oct 05 11:29 AM

[Elliott:]

No big mystery. We've seen this movie many times before in stocks and futures markets -- there was an imbalance of way too many traders on the short side playing the "obvious" UNG monthly rollover. When there's an imbalance all it takes is for a few bulls to light the kindling, then shorts buy to cover, the fire gets bigger, setting off more stop losses on the way up. The market never tolerates an imbalance and always finds a way to restore equilibrium.

Oct 05 11:40 AM

[Mad Hedge F...:]

cde Happy as I am to open beer bottles with my teeth and do my own tattoos, I have recently become a wimp when it comes to trading natural gas futures. I managed to warn my readers that a collapse of Biblical proportions was coming on June 2, when I recommended a sale at $4.40 (click here for the report at www.madhedgefundtrader...). Yes, you may fan me with ostrich feathers like a Middle Eastern potentate for that call. No, I did not predict a $1.90 bottom by throwing a dart at a dartboard. I simply called a half dozen buddies from my drilling days in the Texas Barnet shale and came up with a worst case cost of production of $2/MBTU. As it turned out we got a $2.40 bottom, and then a to $5/MBTU in a nanosecond, obviously the mother of all short covering squeezes. The industry is still on the horns of a massive dilemma. More than 100 years of supplies of CH4 have been discovered recently, but all of the main production companies may go under before we get much of it out of the ground if prices don’t stabilize. Virtually all natural gas storage facilities in the country are either full or locked up by hedge funds, and it is impossible to export the stuff. Many shareholders have recently found religion, praying for a cold winter to balance out supply and demand. Long term, my bet is that the Pickens Plan (click here for my chat with the homespun Boone at www.madhedgefundtrader... ) and pushes prices back up. If you still want to play where traders gulp down a quart of hot steaming volatility before breakfast every morning, e-mail me at madhedgefundtrader.com and I’ll tell you how to get set up. Just keep in mind though that you are moving into one of the toughest neighborhoods in the financial markets, where the “widow maker” lives.

Oct 05 02:08 PM

[Andy Abraham:]

It is very easy to look at Warren Buffet overtime and think one should have invested with him... However there have been severe bumps ( 50% draw downs ) along the way..More so... his teacher Ben Graham blew up in the Great Depression.. I do not know many Commodity trading advisors that have a thought out money management plan...and risk plan that have 50% draw downs.. ( however anything can happen).. The fact is one needs a plan...one needs risk and money management plans... Fundamental analysis.. does not tell me how many contracts or shares to buy... where the trade does not work... and it would be prudent to exit...


On Oct 05 09:27 AM coastside wrote:

> >> Trend followers have a plan and follow it with discipline.
>
> So you're saying fundamentalists don't have a plan and don't follow
> it with discipline? I would say Warren Buffett has a plan and he
> follows it with more discipline than anyone on the market.
>
> Natural gas went up because fundamentalists know that the rig count
> is hovering near its lows. Trend followers reacted when reports
> that gas storage was almost at capacity - and when the prices started
> going down they all jumped on board. The fundamentalists know that
> lower production will eventually cause a rapid drain down during
> the winter. And they will patiently wait for it.

Oct 06 05:43 AM

[Andy Abraham:]

When do you know where there is an imbalance... over bought..over sold... What about imbalances in stocks such as GE..Citi...or Bank of America last year... they were cheap and cheap got cheaper...the way I have made money over the years is a plan that includes what to buy or sell...how much of it...and when to exit with either a profit or loss...this is what systematic trend following is... The idea is last year...Abraham trading..( not me..but I am an investor...was up double digits...and T Boone Pickens basically imploded... Abraham trading is a trend follower... no opinions... will equally go long or short... and he is a systematic trader...


On Oct 05 11:40 AM Elliott wrote:

> No big mystery. We've seen this movie many times before in stocks
> and futures markets -- there was an imbalance of way too many traders
> on the short side playing the "obvious" UNG monthly rollover. When
> there's an imbalance all it takes is for a few bulls to light the
> kindling, then shorts buy to cover, the fire gets bigger, setting
> off more stop losses on the way up. The market never tolerates an
> imbalance and always finds a way to restore equilibrium.

Oct 06 05:47 AM

[Elliott:]

The ambush of gas traders trying to short the UNG rollover was reported in a gas industry subscription-only newsletter, and confirmed in a later Bloomberg news story.


On Oct 06 05:47 AM Andy Abraham wrote:

> When do you know where there is an imbalance... over bought..over
> sold...

Oct 06 12:37 PM

[Ron2008:]

NG went up because the extremely short hedge funds had to get out by buying. That's it.

Their net short went from 139,508 (9/01) to 93,812 (9/29). A decrease of 45,696. Plus they dropped almost 20,000 spreads which were probably short the front month.

Oct 06 03:51 PM