02/04/2014 8:20am CST
Wow… Where to begin? To recap the last two weeks of trading in the natural gas, we have had a tremendous amount of volatility in the continuation of the upward channel of prices. Not once but twice we saw a 10% gain in the daily prices on the March Globex contract, (GNGH14). Both times we had a correction the next day that gave back all of that 10%. While a dollar gain in two weeks of the natural gas contract may not sound like a big deal, it's the extreme volatility that we have seen that has most traders either worried or scratching their heads, depending on which side of the market they are on. Volatility levels reached such a high last week that March $10-12 call options with under a month of time value saw premiums rally to 300-500+ dollars. While things have started this week off on a relatively quiet foot, there is no doubt that both hedgers and speculators alike were pulling up their 5-year continuous charts, looking back to 2008 for a defined resistance point. Lest we forget, natural gas has tremendous upside potential. Prices touched well above 13.00 in July of 2008.
So what is going on and why is this happening? The easy answer is that extreme cold and adverse weather has caused a supply crunch for certain areas. The last traded price today is 5.095 on GNGH14. That is the composite number for all natural gas. Locally in certain areas of the United States, we saw prices reach well above $80.00 in the cash market! Natural gas is still the most popular commodity used for heating purposes and this extreme winter is still showing its effect on the market. EIA inventory saw a draw of 230 BCF last week. Don't be too deceived by this number, there is still plenty of natural gas in our inventories. The worry should be in how price sensitive this market can be to the slightest supply crunch. Energy companies have been toting that they have big intentions for natural gas use and production heading out as far as 2025. If it is indeed the wave of the future to compete with big oil/coal, they are going to need to work on more stability in prices. Can you imagine having a market where gas in Phoenix costs $3.00 a gallon and gas in New York City costs $40.00 a gallon? These discrepancies as well the costs of shipping will be hurdles in the coming years. Now, having said that, I think that these are goals we are capable of reaching. My overall impression is that this market is putting its cards on the table, and what we are seeing is that the potential for demand and upside is definitely there.
Now, let's look at the charts and the way people are making money. As I had mentioned before, call options have been extremely volatile. Buying 6500, 7000, 8000, 10000 even 12500 March calls at the right time have been extremely profitable. Likewise, selling these inflated options at the right time (If you have the risk appetite for shorting naked options) has been a great investment. Pay very close attention to all possible ideas. If 10% daily volatility with futures is too much risk appetite, explore the idea of buying out of the money calls.
Technically, we have been somewhat defined to a 4700 – 5400 range on the March '14 futures. Momentum on a short-term is slightly lower but that comes with a caution flag. We closed above the 9-day moving average which is still bullish. Look for support around 4820 and 4700. Resistance points are 5200 and 5400.
If you'd like to learn more about futures trading or the energies market specifically, please contact Bill Moore at 800-422-6610 or email@example.com.
Mar '14 Natural Gas 9-Month Daily Chart with Moving Averages, RSI and MACD
Source: RJO Vantage
Natural Gas 6-Year Continuous Daily Chart
Source: RJO Vantage