If you follow the tastytrade blog, you may have seen a piece focused on natural gas in June of this year.
At that time, we highlighted the fact that tastytrade's resident futures expert, Pete Mulmat, had noted natural gas prices might be due for a bounce from historic lows.
Since that time, the price for natural gas has indeed charged significantly higher. The 52-week price range of natural gas (quoted per million BTU = mmBtu) is $2.17 and $3.37.
In June of this year the price for natural gas was roughly $2.60, as compared to about two weeks ago (mid-October), when it was trading around $3.20.
Given the significant price appreciation in the last few months, the tastytrade team recently revisited the natural gas topic in an episode of Futures Measures, entitled "Natural Gas: Contango vs. Direction."
As a reminder, the price of natural gas tends to correlate closely with the demand for power (related to weather). When temperatures are very warm in the summer, natural gas prices tend to increase as more people turn on their air conditioning units. The same trend can be observed when temperatures drop in the winter as consumers ratchet up heat usage in their homes.
Autumn in the US started chillier than usual this year, which caused natural gas prices to spike to 52-week highs of $3.37 mmBtu. However, the appearance of warmer weather in late October tempered enthusiasm and prices slid accordingly (now closer to $2.72 mmBtu).
Given recent developments, natural gas may offer a variety of trading opportunities for market participants already involved with the commodity, or those looking for diversification in their portfolios.
For traders that are bullish crude oil, a pairs trade with natural gas may be of interest - especially if you are forecasting a warmer than usual winter. On the other hand, if you are expecting a cooler than average winter you might consider simply getting long natural gas at these levels.
If you are looking to deploy a less directionally-orientated position in natural gas, then the aforementioned episode of Futures Measures is a must watch. On the show, a spread trade is introduced that exploits a phenomenon known as "contango."
Contango in natural gas refers to the fact that out-month futures prices typically trade at higher levels than the front month. Using the current calendar as an example, one would expect to see January prices trading higher than November prices because of the cooler temperatures expected at that time (which is exactly what can be observed in the market).
The reverse situation, known as "backwardization," occurs when front month futures prices trade higher than out-month prices. This may be observed in the height of summer when air conditioners are going full bore and autumn temperatures are expected to be mild (neither heating nor cooling needed).
Going back to Futures Measures, the episode outlines how there are different degrees of both contango and backwardization - meaning the width of the spread between front month and out-month futures prices can vary greatly.
On the show, the hosts present data highlighting that the current spread between front month and out-month natural gas futures prices is relatively wide (steep). The guys then present a natural gas trading example could be deployed to potentially leverage a flattening (tightening) of this spread.
We recommend watching the entire episode of Futures Measures focusing on natural gas contango when your schedule allows.
If you would like to review additional content related to natural gas trading on the tastytrade network, we also recommend the following:
If you have any questions about trading natural gas (or any other commodity) we hope you’ll reach out at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.