Avoid the Oil Hype: Watch Natural Gas

The world’s eyes are watching oil prices. Oil is hitting record after record on its march higher. The world’s economies are closely tied to oil’s fate as evidenced by tumbling stock markets when oil advances. Oil is the lead commodity in what is known to future traders as the “energy complex”. Natural gas is a component of the energy complex and follows oil very closely. It’s often overlooked by traders; however, with the advent of NYMEX miNY natural gas futures, natural gas has become an easily accessible market for traders. This article will provide a brief overview of the natural gas futures market and explain why I believe there is potentially an opportunity right now in this market.

Natural gas is created primarily from methane which is created from the decomposition of non-fossil organic material and in oil fields. It takes heavy processing to turn it into the usable form of natural gas. Its uses included creating Hydrogen, as a power source, and as a fuel product for heating/cooking in consumer’s homes, among other uses. 25% of all energy used in the United States is attributed to natural gas. The futures contract is based on physical delivery to what’s called “The Henry Hub” in Louisiana. This is where 16 major pipelines come together. These pipelines are supplied by sources all over the Midwest and Eastern United States.

The MiNY futures contract represents 2500 million British Thermal Units or BTU’s as opposed to the full size contacts that trade in 10,000 million BTU’s. It trades in all listed months over the next 5 years and the minimum price change or tick is $12.50/contract. The maximum size imposed by the exchange is 999 contracts and MiNY’s contracts symbol is QC. It takes $2784.00 in margin to trade one contract, although several brokers have lower day trade margins for those who close positions prior to the end of the session.

Natural gas is currently undervalued per BTU when compared to crude oil, per Eric Wittenauer, an analyst for Wachovia Securities, as quoted in Futures magazine. It has been in a strong uptrend since December 2007, and appears to track oil very closely. However, over the last several days, oil has taken off on the upside and natural gas has not followed as of this writing. This is potentially a good opportunity for the technical speculative trader to go long natural gas in the belief that it will resume the uptrend just like its older brother in the energy complex, oil. Here are daily charts of both oil and natural gas so you can visualize the correlation:

Remember, these futures can be highly volatile, be certain to use only risk capital and position size accordingly.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.