Almanac Eyes Natural Gas Pattern

02/27/2015 9:00 am EST


There is a seasonal tendency for natural gas companies to enjoy gains from the end of February through the beginning of June, explains Christopher Mistal in Stock Trader's Almanac.

One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States.

In particular, when December and January are colder than normal, we see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April.

This was precisely the situation in December 2013 through February 2014 when natural gas rallied from around $3.75/mmBtu to nearly $6.00/mmBtu. 

A relatively mild start to winter this year combined with plunging crude oil prices has sent natural gas back below $3/mmBtu this week, even as many parts of the US are unseasonably cold. Inventories are healthier now than a year ago, but are still below the 5-year average for this time of year.

This combination of a recent sharp price decline and below average inventories represents an excellent opportunity for new long positions, especially with the coldest winter months still ahead.

First Trust ISE-Revere Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG can be bought on dips below $10.03. Once purchased, use a stop loss of $9.04 and take profits at the auto sell, $12.99.

Top five holdings by weighting as of the latest close are: Talisman Energy (TLM), Matador Resources (MTDR), SM Energy (SM), Comstock Resources (CRK), and Devon Energy (DVN). The net expense ratio is reasonable at 0.6% and the fund has approximately $215 million in assets.

United States Natural Gas (UNG) is suggested to trade the commodity’s seasonality as its assets consist of natural gas futures contracts.

It is highly liquid with assets of nearly $700 million and average daily trading volume in excess of 10 million shares per day on average over the past three months. Its expense ratio is 1%.

UNG could be bought on dips below $14.50. If purchased, set an initial stop loss at $13.12. Profits can be taken at the auto price of $18.77.

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