What You Need to Know Before Buying Nat Gas

Natural gas futures fell its lowest price in two months on Monday. So what's behind the weakness?

Worker checking welds on natural gas pipeline running through a field.
Keith Wood | Stone | Getty Images
Worker checking welds on natural gas pipeline running through a field.

Well first of all, we are currently running higher on the surplus side — the stockpiles of natural gas have reached record highs due to hydraulic fracturing. The relative ease of obtaining and storing natural gas has change the industry forever. This is the main reason that I believe we may be in a $2 to $5 range for the foreseeable future.

On the consumption side, the single largest driver of consumption this time of year is the cold weather. Unfortunately for those who are long natural gas, this has been an unseasonably warm winter.

The final bearish indicator speaks to exposure. Hedge funds have cut their net long positions by 36 percent last week, according to the U.S. Commodity Futures Trading Commission.

So what's the take away? We will need to see a few things to happen before the market breaks out above the $4.09 high that natural gas made on October 22. We will need to see either a demand spike (due to weather or manufacturing) or a drilling reduction, and I would predict that neither of these happens in the short-term.

So if you want to trade natural gas, you need to play the range. Consider playing the long side against this year's low of roughly $3.07, and selling against this year's high of $4.07.

Read on for 10 Things You Need to Know to Trade Futures

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