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Natural gas bulls turn bearish as weather trade gets overcrowded


After rallying 40% in three months and surging to a four year high, natural gas just got really cold, really fast.

“There’s just been an absolute moonshot in natural gas,” says Stifel Nicolaus ETF trader David Lutz in the attached video. “We’ve had two polar vortexes coming in so far. We’ve had a very cold winter, so you’ve definitely got weather momentum.”

It’s not like we haven’t seen any three to five percent dips along the way, because we have. In fact, if you use the U.S. Natural Gas ETF (UNG) as a reference, there have been ten different days in the past six months alone when the fund closed down 2.5% or more.

But as Lutz points out, until Thursday most gas traders had been short and sweating it, as the street’s hottest commodity just kept going up.

“Everybody said, ‘let’s get short natural gas, this is going to be a lay-up trade.’” Lutz recalls, pointing out that history was working against this hottest of all commodities too.

“Seasonality dictates that over the last five years, natural gas lost 25% on average during the first quarter,” he says.

But now, despite reports that are calling for the arrival of a third polar vortex, the formerly cheap and abundant fuel is adding volatility to its list of attributes. Sure reports of record daily demand, frozen wellheads, dwindled stockpiles, propane shortages and a pipeline explosion are still on the front pages, but on the business pages Lutz explains, a totally different sentiment and reality can be found.

“The crowd is rarely right and I’m starting to think that (natural gas) might be a little risky,” Lutz says. “If you’re long natural gas you don't want to be buying more at these prices,” before adding that he is starting to take profits.

In spite of Old Man Winter’s ice cold intentions for the next few weeks, Lutz says in the face of bullishness that’s at an eight year high, “we’ve seen this trade run too far, too fast.”