Short Selling Natural Gas for 1 Year - Financial Suicide?

Natural Gas is one of the most temperamental stock with occasional daily swings of 15%. It's price is affected by politics, weather forecasts, domestic and industrial demand. Many Traders consider leveraged trading of such volatile and unpredictable stock financial suicide. We've been shorting Natural Gas for about 8 months and this is what we've learned.

Natural Gas Demand is Seasonal

As Natural Gas demand is weather dependant, cold weather leads to an increase in demand. However Natural Gas is very versatile and is not the only used for heating. Besides it's uses for fueling cars and manufacturing of plastics, modern solutions also use Liquified Natural Gas for cooling.

The eia reports proved to be a great resource to keep track of the weekly consumption of Natural Gas.

Natural Gas Supply is Seasonal

Natural Gas has a complex supply chain in which many things can go wrong. A significant portion of natural gas is sourced in the Gulf of Mexico - a zone that is haunted by seasonal hurricanes that regularly wreak havoc.

The EIA offers realtime view of what's going on in the gulf of mexico:

https://www.eia.gov/special/gulf_of_mexico/

There are many services that offer tailored weather forcasts that help in making informed decisions.

Before you think you can just buy NatGas in a low-demand season and sell in high demand season please read on.

But what are we trading if we buy $NatGas (on eToro)?

Natural Gas is usually traded in form of expiring contracts. Those contracts are traded many months in advance. This allows consumers of Natural Gas to buy natural gas in advance and secure a predictable price for a Natural Gas. Needles to say those contracts change hands very often as traders speculate on the price development ahead of time.

For instance you can buy and sell contracts for a delivery for december next year. On platforms like eToro you usually trade the contract of next month called the current contract. As we are not interested on the delivery the broker usually rolls you over to the contract of the following month - the next contract. As the price of those contracts is usually different you'll either receive a refund or pay an additional fee to account for the difference.

EToro moves you over from the current to next gradually and refunds or charges a fee on a daily basis. This resulting $NatGas price to be a blend of the current and the next contract.

Henry Hub allows you to monitor how each of the individual contracts change in real-time.

Making Profit by Buying off-season and Selling on Peak Season?

Unfortunately, it's not that easy. Although buying off-season - when contracts are cheap - and selling in peak-season will allow you to sell in profit, you'll most likely accumulate more fees than you made in the trade.

This brings us to square one:

We can only make a profitable trade if we take advantage of the price movements of individual contracts.

Developments during the Pandemic

Next let's recap what happened in 2020 and which events had a major impact on Natural Gas.

Lockdowns lead to reduced demand

The pandemic has not only brought a toll on us but also reduced the overall demand during lockdowns in winter season. This was reflected in the weekly EIA reports which showed repeatetly low demand and drawdown of the Natural Gas reserves of the 48 Us States (Lower48).

source

This Graph shows how the natural gas reserves of the Lower48 over time. The reserves however didn't correlate strongly with the price of natural gas contracts as hurricanes disrupted temporary the offshore production sights in the Gulf of Mexico area.

The most severe disruption was caused by hurricane Delta, which caused 92% of sites not to be operational for several days.

However the gulf of mexico accounts to less than 10% of US production of Natural Gas and those events did not cause a shortage of Natural Gas.