Wt Nat Gas 2x Discussion Threads

[cagey76] 16/9/2009 10:51

Triples, thanks for the answers and advice. So if I think Nat Gas is going to rise over the next couple of months then this ETF is as good as any to trade that rise. But doing it as you have suggested above.

Cheers.

[redprince] 16/9/2009 10:48

that`s good advice triples and i shall heed it.

Many thanks- much appreciated.

[triples] 16/9/2009 10:32

I am not sure they ever buy at spot - I think they just stay in the futures market.

Spot prices converge with futures prices when the near month expires. The ETF managers don't want to have any nasty surprises in the last few days of a contract's life, so they sell out of the current month (which they bought into in the previous month) and buy into the next month before the last week of a contract's life.

The next month is always dearer because of the "cost of carry", ie, storing gas, transport costs, financing charges, etc.

So, forget about spot prices and just look at the futures curve.

To make the big money as a long, you have to be (i) confident of the upward trend, (ii) ready to buy on the dips and sell on the spikes on a short term basis (1 - 3 days) and (iii) ready to add more as it dips further, confident in your belief of (i).

Given you are a little unfamiliar with all this, may I suggest you trade real but small to begin with?

good luck, triples

[cagey76] 16/9/2009 10:29

Triples, any other suggestions for going long on Nat Gas then ?

[redprince] 16/9/2009 10:21

good post triples - tks for that.

So next month always dearer because they sell at spot and buy the future which (unless in backwardation) is always dearer?

Right i am starting to understand this a little better.

So to make the big moolah we want to be in in advance of backwardation ie when spot is greater than future price?

[triples] 16/9/2009 10:12

For the natural gas ETF fund managers to stay in the market, they have to go long on gas futures. To get the liquidity they need, they have to be in the near month future and have done for the life of the ETF. As one month expires, they have have roll forward into the next month. Because of the contango (the next month being more expensive than the current month), they lose money each month they roll forward. It is a substantial amount. They help create the problem as traders see the long only mammoth having to roll and profit from it.

see www.futuresource.com - click on quotes and chose natural gas at the NYME. If you have to sell your long position in Oct to buy into Nov, you pay more. When prices go up, the whole curve goes up but the contango remains. It may change by a few ticks, but it there as a fine for being long and wanting to roll forward -it's the cost of carry and then some.

One day, the gas ETF will be trading in cents rather than dollars.

Also look at LOIL... same thing. Ouch.

Commodity ETFs are not straightforward.

Tracker ETFs are a bit easier (eg, IUKD, IUKP, etc) in that they don't suffer a contango. You just have to get the trend and your timing right. :)

cheers, triples

[redprince] 16/9/2009 10:06

i am struggling to understand the mechanics of this etf.part of the problem is appreciating the rollover effect of the futures price on your position and how that can reduce your stake.The other hidden sting is that this fund uses borrowed money and there are (correct me if am wrong) daily compounded interest charges- its leveraged so completely unlike other stocks.

[cagey76] 16/9/2009 09:42

prbracken, so the explanation as to why this won't go up as much as it should when gas rises, is because it went down more than it should have when gas dropped ?

This isn't meant to be rude, I appreciate your help, but I am still in the dark as to how this ETF actually moves.

[pbracken] 16/9/2009 09:20

cagey - because the leverged relationship is not linear. Just look at the effect of a fall in the price of gas from $13 to $3 has had on ETF stocks: LNGA has fallen from $88 to $1.70. Gas is worth a third of its former value; LNGA is worth just 2% of its former value - and even that represents a premium to its assests.

[cagey76] 16/9/2009 09:09

cagey76 - 15 Sep'09 - 14:11 - 262 of 266 edit
pbracken, I have a horrible feeling I'm suddenly going to see the light, but until I do I'll just keep asking the questions :)

why will daily fluctuations affect the end price ?

pbracken - 15 Sep'09 - 14:13 - 263 of 266
Yes, they most certainly will.


prbracken, nat goes up 10cents, the leveraged etf goes up 20cents, nat gas drops 10cents, the etf drops 20cents, why should that effect a rise from $3 dollars to $10 ?

[riggerdigger] 16/9/2009 07:48

market boy thanks, and all the regulars on here.

[marketboy] 16/9/2009 06:22

interesting read on bloombery

[gdasinv2] 15/9/2009 17:20

Natural gas prices are on an upward trajectory that can likely be sustained into the winter and the new year, says a Calgary energy analyst.

Benchmark natural gas prices rose by 13% yesterday, as the NYMEX natural gas futures for October delivery closed at $3.30 per thousand cubic feet.

"It's recovering," said Peter Linder, noting he expects natural gas prices to continue rising for the remainder of this year and into 2010.

"I'm 99% certain the doomsday prophets are wrong," he said.

Several factors have been pushing natural gas from prices below $3 to current levels, Linder said.

One reason are that hedge funds, anticipating more stringent regulations of commodities markets in the U.S. are buying back their gas contracts.

Another reason is that traders are short-covering, which means they are speculating prices will rise.

But there are also more fundamental changes underway, Linder said: low drilling levels in North America, and the associated drop in production, are gradually having an impact.

The approach of the heating season is another factor.

"People are recognizing that fundamentally, gas can stay so low for only so long," Linder said.

A recovery of Alberta's natural gas sector, however, also hinges on whether the province will further tweak its royalty regime to spur drilling.

"I think all this pessimism within this province will dissipate next year, subject to our premier putting out a reasonable, proper fiscal regime," Linder said.

Alberta's government is currently examining how the province's competitiveness in terms of taxation, regulation and royalties compares to other provinces.

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[pbracken] 15/9/2009 13:13

Yes, they most certainly will.

[cagey76] 15/9/2009 13:11

pbracken, I have a horrible feeling I'm suddenly going to see the light, but until I do I'll just keep asking the questions :)

why will daily fluctuations affect the end price ?

[gdasinv2] 15/9/2009 13:02

Hey guys Math is simple - winter on way + Some extent of economic recovery, which means, Natural Gas will rise from here as Storage will start releasing the GAS, which will drive the price bit up whole winter ( but Not straight ) with bump ride. But by end Dec or Jan the price slowly fall or go up based on what economic recovery by that time. Had it not been winter on way - This rise not posible until Storage release some to mkt. So targer price on LNGA until Dec or Jan end is $4 Max. This is my target price whole winter.

[gazza950] 15/9/2009 13:00

saw this too - not everyone is bearish this week...

Natural gas futures and the ETFs that track them are set to make their largest weekly gains since May as signs of a recovery in the economy continue to emerge.

An uptick in demand for industrial fuels is helping natural gas futures regain the ground they lost this summer. Reg Curren for Bloomberg reports that confidence among U.S. consumers increased in September for the first time in three months as the pace of job losses slowed and the economy showed signs of pulling out of the recession.

A smaller-than-expected increase in U.S. stockpiles also contributed to the spike, and demand is also expected to increase as other power generators such as coal and nuclear plants shut down for maintenance.

[gazza950] 15/9/2009 12:55

to be honest i am more interested in the longer term too - next xmas prob - i will keep taking profits in the meantime just in case there is another severe drop-off...

lots of forecasts suggesting 2010 price for NG will be north of US$7-7.50 and if so LNGA has to get north of where it is now!

[pbracken] 15/9/2009 12:53

cagey - you have to rebase the upside to LNGA according the daily fluctuations. If there were none - that is, if NG sailed merrily higher without interruption, your target might be right. But NG won't do that (IMO). Just be careful you're not left holding the baby when it turns. That SHORT by BARC (see above article) is tempting to follow (though I don't have the balls in truth).

[cagey76] 15/9/2009 12:40

prbracken, Thanks for answering, I am just trying to work out where the etf price should be.

I think I have done what others here have also done, and that is buy Nat Gas when I think it is at a bottom, and have seen this ETF as an ideal way to get onboard. I am actually in with 2/3rds of my punt, the rest is waiting in case I have gone too early, but I am already showing a nice profit.

if nat gas goes up to $10 and we are already working on a december futures price of $5 then we have a $5 rise to come, amd with this being leveraged x2, then we should expect a $10 rise here ?

[snobtimus shaime] 15/9/2009 12:14

What we are seeing here is a technical bubble. For example, the underlying to the NYMEX contract at the Henry Hub lost 11 cents yesterday, while Transco Z6 inched up a penny to 3.16. Go that? NYMEX Henry Hub gas futures closed at 3.297 yesterday afternoon, while the physical gas for delivery into New York City traded around 14 cents lower yesterday morning. NYMEX gas is a bubble... but be careful, Lord Keynes has a point.

He added:

We stand by our words and our numbers. No doubt, gas is cheap. But, if there is no value, than cheap, in and of itself, is not a reason to own something. Back in the 1980s the Yugo GV was cheap also. The car was cheap for a reason. Its Soviet-bloc engineering (see today's G.M.) exuded the feeling it was assembled at gunpoint1. Gas today is cheap for a reason.

There is too damn much of it. Over the weekend Alan Lammey at Natural Gas Week noted that ANR Storage was reported as 97.4% full, Sonat Storage was 97.3% full. Meanwhile, Texas Gas Storage was 96% full, Transco Storage was 83.3% full and Tennessee was estimated at 89% full... and it is only the middle of September for crying out loud.

Olivier Jakob at Petromatrix, meanwhile, once again reminded to what degree the UNG rollover will be playing havoc with the price:

The stronger part of the Energy complex was Natural Gas but we continue to discount this great volatility experienced during the roll of the indices. Natural Gas Futures were up close to +11% but the UNG which is supposed to track the NG Futures was higher by only +3.7% as arbitrageurs were busy pocketing the hot-air premium of the UNG by buying NatGas against selling the UNG.

Meanwhile retail investors will be scratching their head as to why NatGas Futures go higher but not the UNG. It was pretty savvy timing from the Fund to announce one day before the roll that it will be creating new shares at the end of the month. This forces about half of the contango roll to be done through the share price loosing its 16% premium rather than through the Fund's market positions. On the first day of the roll most of the position cuts were done on the ICE Natural Gas Swaps.

Barclays, meanwhile, saw the ramp up in Monday's price as reason to open up a short position. As they wrote:

...we are opening a short position in the November Natural Gas contract based on today's closing price on HH natural gas has pushed steadily lower since early August.

The hope at the time was that inventory injections were showing signs of tightening and that this process would deliver a storage finish meaningfully different from the trainwreck 3.9 Tcf level that we and the market had expected. Hopes were quashed by a cool August, no stirring in the tropics, and a balance that did not continue to tighten incrementally on a weather-adjusted basis. Again, this hope has been introduced to the market in the form of the most recent storage injection. While higher than last year's and five-year average injections, it was smaller than expected on a weather-adjusted basis. To us, if the balance is showing tightening (which with one week of evidence is debatable), it is for one of two reasons: higher coal displacement and/or forced producer curtailments, neither of which has bullish implications.

Post-summer power loads will not enable the same amount of switching going into the shoulder fall season. And, producer curtailments may be too little, too late in a move that implies a "forced-hand" as operational constraints push volumes upstream. With storage at nearly 3.4 Tcf, the test is now. There are eight weeks of inventory releases until the traditional injection season concludes, and more than 450 Bcf to go in implied five-year average builds during this time.

To us, this suggests weaker cash prices and pressure on the prompt contract through the end of October. We choose the November contract (which expires in late October) to exercise our view, which is currently priced 70 cents off the lows, and a full $1.80 above the lows for the continuous prompt contract.

[gazza950] 15/9/2009 12:13

regardless of the contago pullback on long term LONG upside this is breaking out again, might take some profits if we hit 1.85-90 - then again if this breaks 1.90 on the US open i can see it going straught north of 2.00

i am not convinced about the supply side and the lack of storage, on energy creation potential alone NatGas is too cheap in the US

my target is 2.40 for LNGA within 6 weeks

[pbracken] 15/9/2009 12:08

I think I said a $10 price for NG would be capped at around $4.50 for LNGA, cagey. I will be the first to admit I might be wrong, but for now I'll stick with it.

Of course, if gas rose in a straightline to $10 I would be wrong, but I suspect we'll see some savage pullbacks that will take LNGA back to $1.20. It's the pullbacks that effectively kill the leveraged upside. For example, if gas fell to $3 (and who'd bet against it?), LNGA would probably hit $1.30. If gas fell to retest it's recent low, LNGA would be lucky to trade above 80 cents. I'll say it again, ETFs are notriously difficult to trade LONG when the curve is against you. Timing - always important, of course - becomes paramount.

Always lock-in your profits.

[gdasinv2] 15/9/2009 12:02

NEW YORK - Natural gas demonstrated again how much it has split from the direction of crude, as prices spiked more than 13 percent despite an enormous glut in supply.
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Crude prices fell for the second straight trading day.

Analysts at Goldman Sachs said prices for natural gas may even triple over the winter, though most energy experts say there is a far greater chance prices will plunge again.

There are two big factors that support the latter view, which would mean extremely cheap heating bills this winter for a lot of people.

The first is that natural gas in storage is 17 percent greater than it was last year. And the US Energy Information Administration said in its short-term outlook that it expects another 12 percent buildup through October.

At the same time, most meteorologists predict a very mild winter for large parts of the country. With demand already way down from industrial utility customers, the United States has an enormous amount of unused natural gas.

Oil and natural gas have historically tracked one another as far as prices go, but this year has been a different story.

Benchmark crude for October delivery fell 43 cents to settle at $68.86 a barrel. On Friday, the contract tumbled $2.65 to settle at $69.29.

In other Nymex trading, heating oil for October delivery was essentially flat at $1.7321 a gallon.

Natural gas jumped 40 cents to $3.357 per 1,000 cubic feet