Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation
It isn’t very often, or rather practical, for investors to think about natural gas in the summer. For decades, the primary use of natural gas in the modern sense was as a fuel used to power furnaces and heaters for the millions of American homes set up in cold weather.
There are no secrets behind the devastating year the natural gas market has undergone. A strangely warm winter has put pressure on natural gas prices, and subsequently they have plummeted to near record lows. Simultaneously, they have resisted any sort of drastic rebound many analysts would have expected.
The truth is that the United States simply has more natural gas than they need. However, Bakken and U.S. Energy Shale separately managed account portfolio manager Tyler Kocon of Split Rock Private Trading is looking to jump back into the natural gas market over the coming weeks. Split Rock plans to do so for several key reasons.
For the first time in the history of the United States, electricity generated from natural gas power plants has equaled that of electricity generated from coal-fired power plants. While this is significant for the ever-changing energy future of the United States, it also indicates that demand for natural gas will likely only increase.
Since hitting bottom at $1.82 per BTU in late April of 2012, natural gas prices have actually recovered 53% to close at $2.78 per BTU (as of July 3rd, 2012). While still low, this price is vastly more improved, indicating that natural gas may be rebounding into more recognizable territory.
Our research department (based on content in the Commodity Trader’s Almanac 2012) has isolated a specific natural gas trade taking place in late July. This trade, which runs essentially from July 26th to October 22nd, attempts to take advantage of the rising price of natural gas in the summer due to increased electricity usage from air conditioners across the country. It’s not winter, but natural gas is still a viable resource used for climate control in buildings all over the United States.
While the Almanac puts a tentative deadline of on or around October 22nd for this trade, our research department has discovered (especially in recent years) an investor is better off keeping this trade on until early to mid-December in order to realize the maximum potential. Overall, the Commodity Trader’s Almanac states that this trade has been effective 12 times over the past 21 years, which translates to an overall success rate of 57.1%.
Coupling the relative success of this natural gas trade along with the fact that natural gas electricity generation is higher than it has ever been, this suggests that the traditional summer spike in natural gas might be even more exaggerated than in the past. An unseasonably warm winter has also led to an unseasonably warm summer and the recent spike in temperatures have undoubtedly increased electricity usage among natural gas power plants.
Split Rock Private Trading plans to utilize this strategy within the Bakken and U.S. Energy Shale separately managed account, which is distributed through Covestor. The precipitous drop in natural gas prices appear poised for a rebound as the summer weather continues to heat up around the country. Natural gas is no longer just a winter weather trade.