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Natural Gas: Fading the Weather

Nat Gas

Traders have a tendency to become obsessed with news and data. When you sit in a room all day trying to predict the next movement in something that is inherently unpredictable it is only natural to look for solid things that could give you clues. Thus, for stock traders, any economic data, no matter how obscure, is pored over and analyzed. Currency traders do the same with anything said by central bankers. For oil traders it is the historically unreliable weekly inventory figures or, even more bizarrely, an estimate of oil stocks from the API that often bears little resemblance to the official numbers. Natural gas traders, like the natives of my home country England, are obsessed with the weather.

More accurately, I suppose, they are obsessed with weather forecasts, and that creates an opportunity for traders. There are sound reasons why those forecasts affect natural gas prices as much as they do, but the very nature of them makes fading the moves that they cause a trade that wins more than it loses.

(Click to enlarge)

Natural gas is rapidly moving to a dominant position in electricity generation in America and has a healthy toehold as another power source in U.S. homes, and clearly the weather has a direct effect on domestic power consumption. We obviously use more power to heat and cool buildings when the weather is extreme, but energy usage can also be affected by weather that is simply a little unseasonal. As I write this I am in New England,…

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