Hello everybody,
As an avid energy trader, I have followed the introduction of "NGAS", listed on the LSE, which is a natural gas tracker.
Some comments here are pertinent, but incomplete. NGAS is a fantastic instrument for playing nat gas if important elements are understood and taken into consideration when trading NGAS.
First of all, the natural gas market is particularly sensitive to fundamentals such as stocks in reserve, temperature, wellhead prices, its comparative cost to oil ...etc. If you are not willing to take the time to learn how these funadamentals impact prices, and follow up religiously on publications and news, don't even bother attempting to trade nat gas ... you will get severly burned sooner or latter.
In regards to the VERY high rate of contango AND backwardation between certain expiries in nat gas markets (especialy near the end of winter and the end of fall months), you can use this to your advantage if you understand contango/backwardation.
Last week, when NGAS was introduced on LSE, I noticed that:
1) Nat gas front month was trading at about 5.50... BELOW average wellhead prices (6.40 at the time)
2) COT data was particularly extreme (possibly due to Amaranth)
3) underground stockpiling was near historically peak levels
4) we are near the end of the stockpiling season (april to october)
... these conditions are idealfor building long nat gas positions. So, I pilled into long nat gas (via QG & NGAS) when QG was at 5.50. ... so far, this position is showing a profit of about 18%, but I am still looking for nat gas to hit at least 10.00 during the next 2 or 3 months.
The contango between the Nov & Dec contracts is 21.8% (as of Oct. 6th, Nov. NG is 6.427, and Dec NG is 7.827). Assuming that this contango remains more or less stable, this contango will impact negatively on the NAV of NGAS when the managers of NGAS roll from November into December.
Knowing that the rollover period of NGAS takes 5 days, from the 9th of October to the 13th, I will reverse my position during this period, thus taking profits from my long position and going short NGAS during the roll period. Even if natural gas prices tend to increase during this period, I will gain about 20% just in the roll (assuming that the contango remains more or less the same). Therefore, being short NGAS during the roll period, when the market is in contango, will pay fairly big if prices remain stable, and even if prices increase while I am short NGAS, the contango during the roll period will most likely compensate for all of the movement against my short position.
At the end of the roll period, I intend to get back into a long position on NGAS.
This procedure may be repeated a few times during the contango market (generaly during fall & winter months).
Once the end of the winter comes around and the near months are in backwardation, the same principles apply ... everything is just reversed.
To end, I think it is safe to say that if you are willing to do some homework and keep up to date on things, there are enournous opportuities in NGAS. ... For those of you who think you can just trade NGAS off a chart, think again ! Though all this may seem somewhat confusing to many at first, with a bit of research it is relatively simple.
Good luck to all.
