Talking Numbers

Cold weather is making this commodity hot

Talking Numbers

Natural gas is at multi-year highs as cold weather sweeps across North America. But, could this hot commodity land investors in hot water?

It may be cold outside for much of North America but there's at least one commodity that's been heating up because of it – natural gas.

Since the start of 2014, natural gas is up 13%; trading at $4.76 per million British thermal units (BTUs), natural gas hasn't seen prices this high since 2010.

However, natural gas is a volatile commodity to trade, warns CNBC contributor Gina Sanchez, founder of Chantico Global.

"Anyone who trades natural gas knows that natural gas trades with the weather," says Sanchez. "When you get extreme weather like we've had, the price will go way out of sync and it will come right back down."

(Watch: Nat gas declines by 107 BCF)

For Sanchez, current prices are probably too high in natural gas. Even though the US Department of Energy says natural gas storage is down 4% compared to last week and is 20% less than last year due to heightened demand, natural gas production has been on the rise over the past several years. US gross natural gas production is roughly 75 billion cubic feet a day, 10 billion more than it was in the spring of 2010. And, it's only expected to go up in the coming years.

"We have been extracting natural gas out of the ground at a much higher rate," says Sanchez. "There's probably more pressure and the [the] high extraction rate would support it going down. But, we still don't know yet what weather patterns we're going to get for February and March. If we have surprisingly cold weather in both February and March, then we could actually linger and even go up."

However, many market participants are already looking for prices to head down.

“While there are a lot of weather related fundamentals driving prices higher, exchange-traded product flows seem to indicate that many traders are positioning for a pullback,” says Nick Cherney, Chief Investment officer at VelocityShares, to Talking Numbers. The VelocityShares 3x Long Natural Gas ETN (UGAZ) is one such product; it tracks the S&P GSCI Natural Gas Index and leverages it by a factor of three.

(Watch: Why the nat gas rally will continue: Trader)

To use technical analysis to trade such things as UGAZ, CNBC contributor Andrew Busch, editor and publisher of The Busch Update, recommends using a moving average crossover strategy involving the 10-day and 30-day moving averages.

"I really like this especially when it comes to commodities," says Busch, "because it has a tendency to smooth things out a little bit a give you a better snapshot of what's going on. With that in mind this things has worked really well over the last year."

The basic idea behind Busch's strategy is to buy UGAZ whenever the 10-day average crosses above the 30-day. Likewise, it is sold when the 10-day falls below the 30-day.

"It's worked really well between March and November," says Busch, though he notes it didn't fare so well recently, though he remains committed to it. The signal currently says to short.

"I would continue to follow this until proven wrong," says Busch. "I would stay short until you get that 10-day moving average to break back above the 30-day."

VelocityShares' Cherney notes that, indeed, some investors are taking more short positions, but they are using a bearish ETN, the DGAZ (which is a leveraged bearish exposure to gas futures).

“Interestingly, many traders seem to be betting on a reversion, with DGAZ seeing significant increases in trading and assets," says Cherney.

Ultimately, the prospects for going long natural gas are not so promising, according to Busch.

"I think natural gas is pretty volatile obviously," says Busch "Overall, due to supply, I'm more inclined to sell it than to buy it."


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