Natural Gas Picks

As mentioned in my Natural Gas Outlook, I am forecasting natural gas prices to rise and possibly double in the next 12 months. If you haven’t read that post, please do. It contains a number of slides from a recent presentation I gave on the topic.

The problem with betting on commodities is the extremely high carry cost for holding futures that far out. So you can either swing trade natural gas with a long bias, or use equities as your trading/investment vehicle.

So Here’s The Trade:

Let’s start with the US Nat Gas ETF, $UNG. Full warning here – this is a terrible long term ETF to buy and hold – it’s design will cause it to underperform natural gas spot prices over time. Therefore, only use it as a swing trading vehicle; I’m talking time-frames of days to, at most, a couple weeks.

I’d like to see $UNG consolidate above $7.00 for a few days before taking a stab at the long side. It’s very volatile so use stops and trade it very tight:

A better approach for a longer time-frame investment would be equities. In this respect I have 3 companies that I think could be useful for upside natural gas exposure:

Long: $EQT (EQT Corporation) – at 25% of position

Long: $CNX (Consol Energy Inc) – at 25% of position

Short: $LNG (Cheniere Energy Inc) – at 50% of position

As you can see with the relative position sizes above, I think a three-way trade with 50% long and 50% short equity exposure will keep you relatively net neutral the overall market.

In addition, I think you should only pull the trigger on each leg of this trade when each individual stock actually breaks out. So far, I am only in the $LNG portion, as I’m waiting for $CNX and $EQT to consolidate and show some further strength.

Refer to the charts and levels below: