A turbulent market known for its volatility has erupted again this week. The U.S. futures on natural gas measured in price per British thermal units operates on the Nymex commodities exchange, part of the CME Group. The operator of large derivative and futures exchanges took “emergency action” to maintain orderly trading in natural gas contracts as wild price swings gave rise to fears of forced selling on Thursday. After gaining 18 percent on Wednesday, Nymex December gas was 14.4 percent lower on Thursday morning, retreating to $4.143 per million British thermal units. Each of those single-day price percentage swings is greater than an annual return on the S&P 500.
From a trading perspective, there are at least two things to point your finger at; the weather and speculative traders. Commodity experts are speculating that at least part of the catalyst for the rally in natural gas to its highest level in about four years is a cold snap in the East Coast. According to analysts at Citigroup, some traders have maintained short, or bearish, positions in gas and long, or bullish, positions in crude oil and “the unwinding of positions in one of these two commodities could potentially have triggered the opposite effect on the other commodity.”
This can be seen in the Commitments of Traders Report (COT). The Commitments of Traders is a weekly market report issued by the Commodity Futures Trading Commission enumerating the holdings of participants in various futures markets in the United States. One of the theories behind the COT report is that speculators, large and particularly small, are usually on the wrong side of the equation. The producers and those involved in the industry have knowledge that is not available to the general public, as a result of their work in the sector.
As you notice in the COT natural gas chart above, small speculators and money managers held long positions for the last several months, being an indication that November may set natural gas up for a price decline. If the ride in natural gas futures isn’t volatile enough for you, take a look at a triple-leveraged natural gas ETN. You have been a happy camper until today if you were long the ETN in natural gas The VelocityShares 3x Long Natural Gas ETN UGAZ, -56.42% which is pegged to the S&P GSCI Natural Gas Index Excess Return SPGSNGP, -2.47% has returned 77% so far this week, pushing its year-to-date gain of nearly 200%, according to FactSet data. In generalities, these ETN’s are not a buy-and-hold strategy. One uses them in the short-term to speculate or hedge another position. As we saw Thursday, they can go down even faster than they can go up.
Moves in natural gas and oil have rattled investors, with the Dow Jones Industrial sliding 100 points on Tuesday, while the S&P 500 and the Nasdaq Composite Index remained under pressure amid concerns that tanking commodity prices were sending a bearish signal to investors about the economy. Volumes of benchmark Henry Hub natural gas futures on the Nymex were a record 1.6 contracts on Wednesday, more than four times the average. If you thought you liked volatility via the VIX, it pales in comparison to what is going on right now in the energy markets.