In the United States, natural gas, coal, and refined petroleum products are used as substitutes in electric power generation. Electric power generators switch back and forth, preferring to use whichever energy source is less expensive. Natural gas is also a cleaner burning fuel source, and as crude oil stubbornly remains elevated despite sluggish global growth, the less expensive product is still natural gas.
Buying the November natural gas future on or about July 24th and holding until about October 21 has worked thirteen times in the past twenty-three years, for a success rate of 56.5%. Mild winter weather and ample supplies have lead to a glut in natural gas in recent years resulting in losses for this trade in five of the last seven years. As natural gas stocks are about 14% lower this year than last, this trade could prove profitable again this year.
In the chart below, natural gas’s seasonal tendency has shifted recently with an initial bottom in late July and a second bottom around mid-September. Ample production coupled with few hurricane-related disruptions has mitigated the usual air-conditioning driven spike in demand. But, as we exit the summer season, weather can still play a role in September, when hurricanes can and have threatened production in the Gulf of Mexico.
Traders and investors have numerous choices available to take advantage of this seasonal price move. United States Natural Gas (UNG) and iPath DJ-UBS Natural Gas ETN (GAZ) are two that we have traded in the past. Yet another possibility is the stocks of companies that find, produce, develop, and distribute natural gas. For this trade we will choose UNG as it is highly liquid, trading better than 4.8 million shares per day on average over the past three months.
Presently UNG’s technical picture is soft. Although it’s stochastic and MACD indicators are on buy, relative strength is fading, so we will look to add UNG to the Almanac Investor ETF Portfolio at $19.05 or better which is just above its projected monthly support level (green dashed line). Once purchased, employ a stop loss at $17.15 to limit losses should the technical picture fail to improve. For tracking purposes, this trade idea will appear in the Almanac Investor ETF Portfolio.