Towards the end of one year and at the beginning of the next, I, like most people I imagine, typically take time to look back on the trading year and see what I can learn from it. Then I apply that analysis to current pricing and work out a base case for stocks, sectors, and commodities for the coming year. I did that this year, and if you are a regular reader, you will have seen the fruits of that over the last month or so, as I gave out some stocks that I will be watching closely this year and wrote about what I thought oil would do going forward. What you may have noticed, though, is that I didn't write any analysis of natural gas at year's end.
There was a perfectly good reason for that…natty's chart for 2022 and early in 2023 pretty much defies analysis…
It was a year of wild swings, even for the often volatile natty. Early in the year, after Russia invaded Ukraine, the main US natural gas futures contract, NG, nearly tripled in the space of six months. That made sense given the outsized role Russia plays in global supply, particularly to European nations, but even within that move up there were some pretty serious retracements. Then the real fun began, with natty losing nearly fifty percent in two months, then bouncing back to gain 60%, then collapse again at the end of the year.
Are you dizzy yet?
From a trading perspective, all of that was fun, as long as you stayed disciplined. Trading natty last year was not really about…
Towards the end of one year and at the beginning of the next, I, like most people I imagine, typically take time to look back on the trading year and see what I can learn from it. Then I apply that analysis to current pricing and work out a base case for stocks, sectors, and commodities for the coming year. I did that this year, and if you are a regular reader, you will have seen the fruits of that over the last month or so, as I gave out some stocks that I will be watching closely this year and wrote about what I thought oil would do going forward. What you may have noticed, though, is that I didn't write any analysis of natural gas at year's end.
There was a perfectly good reason for that…natty's chart for 2022 and early in 2023 pretty much defies analysis…
It was a year of wild swings, even for the often volatile natty. Early in the year, after Russia invaded Ukraine, the main US natural gas futures contract, NG, nearly tripled in the space of six months. That made sense given the outsized role Russia plays in global supply, particularly to European nations, but even within that move up there were some pretty serious retracements. Then the real fun began, with natty losing nearly fifty percent in two months, then bouncing back to gain 60%, then collapse again at the end of the year.
Are you dizzy yet?
From a trading perspective, all of that was fun, as long as you stayed disciplined. Trading natty last year was not really about having a view, but rather joining in a move, with small positions and fairly tight stops that you stuck to. It was the ultimate momentum play for most of the year.
As those of you who have followed my work over the last decade or so will know, though, I am more of a contrarian trader than a real momo guy. To me, the potential should you lick something up close to the end of a sustained move is so large that it more than makes up for the inherent risks in trying to catch a falling knife, again as long as you do it in a disciplined way. So, I am happy to say that the first opportunity I see in natty this year is a contrarian one.
Let's start with the fundamental case, which is not so much about what will happen as it is about what won't. The latest collapse in natural gas has been about the weather, as big moves in the commodity often are now that it is such an important fuel for electricity generation. Most of the US has, so far, experienced a remarkably mild winter, reducing gas demand. However, does your experience tell you that when it comes to weather, the last couple of months are a reliable indicator of what to expect for the next couple? Mine doesn't, and yet natty is priced as if there will be no cold snap at all this year.
Nor is it likely that the Russian war in Ukraine will end soon. European nations and the US are sending more and better weapons to Ukraine but, based on history, the most likely result of that is that the Ukrainians will have enough resources to keep the war going, but not enough to win it. The cynic in me says that is deliberate given the advantages to NATO of having an exhausted Russia caught up in a long, drawn-out war, but that isn't really relevant here. What is relevant is that natural gas supply from Russia will remain disrupted for some time, increasing demand for LNG exports from the US.
From a technical perspective I am not looking at a specific price level here but the current area, just above $3 for the US futures and just above 60 euros for the CME Dutch TTF contract, the main European benchmark, are somewhat significant. In both cases, futures are around the lows of a previous retracement which, while not a super strong support, may well be enough if traders are looking for a level to cut shorts and prepare for the almost inevitable change in the weather.
So, I will be buying NG, but with the provisos mentioned above. My initial position will be minimal, with a view to average on either a drop to around 3.10 or a pop to around 3.50. My initial stop will be at 2.97. which is further away than I would usually like, but okay for a tiny starting position, and will be tightened before long if the volatility calms down a bit.
Long NG is risky when everyone says it is going lower, but that appeals to my contrarian side. I was taught a long time ago that if everyone you talk to agrees on a position and/or a direction, the best place to be is on the other side of that trade. I will happily do that in this case.
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