We’ve got to talk about natural gas, because it’s recently been by far the most volatile commodity and, truth be told, a fantastic long-term investment for the past year. Is there still opportunity in the space? What should we make of this mercurial commodity now?
Look at a long-term chart of natural gas, and you’d have made quite a score over the last year, just by being long. Since a spot price low of under $2/mcf in the spring of 2012, we saw futures top $5.50/mcf briefly yesterday before February futures expired. Even my most hated ETF the United States natural gas fund (UNG) rallied from $18 to over $26 since early December.
Much of this recent rally has obviously been due to extreme cold reaching far into the southland of the US. The market itself is expressing the short-term nature of this phenomenon as well: While March is trading today at $5.10/mcf, futures for May are trading at $4.35/mcf and are under $4 as soon as the spring of 2015. This deep level of backwardation in the curve of prices is a classic indication of short-term conditions impacting front month futures while not greatly impacting longer-term price expectations.
But here’s the thing, and a most important thing it is: futures curves of prices of most commodities are notoriously bad predictors of future price action. Have a look at the recent activity of natural gas itself if you want proof. After…