Something Unnatural About the Gas Rally

by Brad Zigler

Natural gas investors must love volatility. They have to. They get so much of it.

March natural gas futures on NYMEX settled 1.3% higher Wednesday at $8.045 per million BTU. The iPath Dow Jones-AIG Natural Gas ETN (NYSE Arca: GAZ) did even better, shooting up 1.8%, while the United States Natural Gas ETF (Amex: UNG) lagged slightly with a 1.2% gain. The gains came ahead of the Energy Department's release of natural gas inventories expected today.

UNG prices whip up and down at an alarming rate while tracking gas price deliveries at the Henry Hub, Louisiana. Volatility is clocked at a whopping 43%, about three times that of the stock market. Unfortunately, most of that volatility has been to the downside. UNG has lost ground at a 30% annualized clip since the portfolio was launched in April 2007.

Now, however, there are signs that natural gas might finally climb out of its funk. A colder-than-expected winter and stagnant drilling are pinching supplies, while cheaper oil field service costs are improving producers' margins.

North American inventories are now 221 billion cubic feet (bcf) below last year's level. A further drawdown of 225 to 235 bcf is anticipated by traders.

Technically, the market's not out of the woods, though many indicators have turned bullish. The MACD indicator is in bullish territory, but that doesn't rule out the possibility of a short-term decline. Stochastics, too, are pointing to an uptrend and even signal a little toppiness in the short-term trend.

With that in mind, pullbacks might turn out to be good buying opportunities for investors wanting to fuel their portfolios.

NYMEX Natural Gas (Weekly)