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Simple Risk/Reward Makes Natural Gas A Logical Buy

There really is no better thing for a trader than when something, a stock, commodity or whatever, gets stuck in a range. It gives the opportunity to buy and sell at obvious levels with the added bonus that you can even make money when you get it wrong and the breakout comes. Over the last month or so natural gas futures have fitted that bill.

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Chronic oversupply in the U.S. market has put a top on gas at around $2.20 since February, but each time prices sink below, or close to, $2 the reality kicks in that it can only really go so low. At some point this sustained run of depressed prices will cause production cuts in some way shape or form, so buyers will always surface at those levels.

For over a month now going short at just below 2.20 and long just above $2 with stops at $2.10 and $1.90 respectively has been a fantastic trade, and there is no reason to not try it again here, but it is beginning to look like the end is in sight. There is already evidence that the E&P and capex cuts that U.S. firms made at the end of last year are beginning to affect oil production, a fact that has been at least partly responsible for oil’s strong rally since the end of February.

(Click to enlarge)

Natural gas, on the other hand, has failed to respond to the prospect of reduced supply, and for two main reasons. The first is that the U.S. market was so massively oversupplied last year that even the kind of reductions we…

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