By OptionsXpress on April 14, 2009
One of the most relentless bear markets of the past several months has been the Natural Gas futures market, with nearby futures prices falling to lows yesterday not seen in over six years. A relatively tame winter combined with a sharp drop in industrial demand has caused Natural Gas storage volume to soar, with supplies currently 22.7% above the 5-year average.
The beginning of April is usually considered beginning of the storage injection period, and last week’s EIA storage report confirmed this with a stocks build of 20 billion cubic feet (bcf), which was 7 bcf above pre-report estimates. Commercial users (such as factories and power plants) account for an estimated 30 percent of Natural Gas usage, and the weak economic climate has definitely taken its toll on commercial usage, with the Energy Department estimating that commercial demand would fall by 6% in 2009 - which if true, would not help to alleviate the current burdensome supplies in the U.S. Low gas prices have affected gas producers as well, with the number of gas rigs drilling for Natural Gas dropping below 800, or less than ½ the number in production at its peak last fall. Though the current fundamentals look to favor the bear camp, any signs of renewed industrial demand could catch the market by surprise and eat into the current surplus.Weather conditions could also change the supply/demand balance, especially if warmer than normal temperatures arrive this summer, which would increase the cooling demand as power plants use more Natural Gas to supply electricity for air conditioning needs. Later, as summer approaches, traders will turn their focus to the weather radars, as the start of Atlantic Hurricane season begins on June 1st and runs through November 30th . It is not uncommon for market participants to begin pricing a “weather premium” into Natural Gas prices to compensate for a disruption in the Gulf of Mexico should a storm system interrupt production.
Natural Gas futures are notorious for sharp or even violent price moves, especially if production is taken offline due to a severe storm. Given the high historic volatility in Natural Gas futures, it should come as no surprise to experienced futures options traders that options on Natural Gas futures are usually very expensive, especially going out into the fall and winter months. Traders expecting a potential recovery in Natural Gas prices later this year may wish to investigate bull call spreads in Natural Gas options. The advantages of a bull call spread are the lower costs over an outright long option position, with the short leg of this spread offsetting some of the cost of the long leg. The down side to this spread is capping of potential gains to the short strike price of the spread. An example of a bull call spread would be buying the November Natural Gas 6 calls and selling the November Natural Gas 9 calls.As of this writing, with the NGX9 futures trading at 4.820, the spread could be bought for approximately $3,200, which would also be the maximum loss on the trade should November Natural Gas prices remain below 6.000 at the option expiration in late October. The maximum potential gain is $30,000 minus the premium paid for the spread, which could possibly be realized if November Natural Gas is trading above $9.000 at option expiration.
Technicals
Looking at the daily chart for November Natural Gas, we notice the extent that this bear market has run since the highs were made last July. Prices remain well below the 100-day moving average but are holding just below the 20-day moving average, which is popular with many short-term momentum traders. The 14-day is well off its low readings, setting up a potential bullish divergence, as this momentum indicator has failed to make a new low reading as prices fell to contract lows. Support is seen at 4.500, with resistance found at the recent highs of 5.485.
No comments:
Post a Comment