A Real Idiosyncratic Asset - Natural Gas Daily

| About: The United (UNG)
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Summary

Natural gas prices are diverting from the global sell-off.

Natural gas is one of the few idiosyncratic assets.

Be sure to understand all the caveats with UNG before you trade it.

Global risk assets continue to sell off, but natural gas prices are moving up. What gives?

Natural gas is one of the few asset classes that offers investors uncorrelated market returns. This might not be true if you are long natural gas producers, but it certainly is if you are buying natural gas futures.

Price movement is largely dependent on weather, storage injection, supply, and demand forecasts. Each day, firms like PointLogic, PIRA, RBN, Bentek, and others report flow data and power plant generation. Unlike oil markets, traders in the natural gas world get much more clarity on data and physical flows, thus allowing them to make more informed "insider" like decisions. For the average investor, following weather forecasts and reading RBN Energy is generally a good way to gauge the fundamentals. But unless you are willing to fork out over $100K a year, you won't get the complete picture.

This is what makes natural gas so difficult to trade and predict. Because information flows vary from consultant to consultant, sometimes you can get conflicting information. For example, Bentek reports U.S. gas production around 70 Bcf/d, while others like RBN Energy reports 72 Bcf/d. The magnitude of the difference is quite large, but the directional moves are usually in sync. Both firms reported that U.S. gas production took a hit on Friday due to a gas plant outage in the Northeast, and both are reporting a slight rebound in production today as the gas plant comes back online.

Here's another example. All the firms we follow make end of injection storage figures, but the delta between them is over 200 Bcf. The large difference has to do with the weekly models having different inputs. If one firm estimates U.S. production at 72 Bcf/d and another at 70 Bcf/d, the difference would be large as the weekly injection difference would be 14 Bcf.

The above are just some of the reasons why we don't actually trade natural gas futures. The unpredictability and the violent swings can make for some difficult days. Instead, we have chosen the equity route as the way to play higher natural gas prices.

The problem that you run into when buying natural gas producers is that it's no longer idiosyncratic. If equity markets are down, natural gas producers will be down as well. The correlation is still high. The comforting fact is that the fundamentals will be dictated by an idiosyncratic asset, so stock prices will eventually revert to the higher gas prices.

The other problem people run into when buying natural gas producers is the competency behind analyzing an oil and gas producer. We wrote a guide on how to look at E&P companies here, so be sure to read this.

Natural gas is a real idiosyncratic asset. It's not correlated with the global economy and things like Brexit don't really affect natural gas prices. But it's an extremely difficult asset class to consistently profit from trading in and out of. We strongly advise readers to have a deeper knowledge of the natural gas space before trading things like UNG.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.