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Posted on 02 October 2011.
There are a number of natural gas trading strategies that can be implemented to trade natural gas on both the long and the short side. Natural gas trading strategies utilize natural gas futures and Exchange Traded Funds (ETFs) that derive their valuation from natural gas futures (see Buying and Selling Futures).
The following is a list of the most popular ETFs that can be utilized for trading natural gas futures on both the long and short side.
The value of natural gas futures are affected by a wide variety of forces, including supply and demand, seasonal factors, and economic factors. Unlike the crude oil futures markets, the natural gas markets are regional in nature, and are not affected directly by world events that cause the price of crude oil futures to fluctuate greatly. This makes the natural gas futures easier to trade than crude oil futures, since a natural gas futures trader can focus on domestic United States events.
There are two primary natural gas trading strategies, seasonal and economic. Both of these natural gas trading strategies are affected by broader supply and demand issues concerning the domestic natural gas markets. Natural gas prices have been in a long term downtrend over the past five years due to two supply and demand forces. First, supply of natural gas has increased significantly in the United States over the past five years because of the rapid increase in drilling for natural gas in shale formations that were once thought to be incapable of producing natural gas. Second, demand for natural gas has lessened in the United States in recent years, due to the economic slowdown that began in late 2007.
Despite the long term downward trend in natural gas prices over the past five years, there are still ample natural gas futures trading opportunities that take advantage of the seasonal and economic natural gas futures trading strategies.
The seasonal natural gas futures trading strategy is rather simple. Buy natural gas futures either directly or through an ETF in fall, during what the industry calls the shoulder season. The fall is a time when natural gas demand is low and natural gas futures prices are usually depressed. Sell the natural gas futures in the middle of the winter, when natural gas demand is high due to heating demand and natural gas futures prices are usually elevated. Another seasonal natural gas futures trade can be made by shorting natural gas futures in the middle of the winter and covering the short in the spring, when demand for natural gas reaches another seasonal low point. A third seasonal natural gas futures trade, which is not as reliable as the first two, involves buying natural gas futures in the spring and selling them in the summer, when demand for natural gas generated electricity for cooling is often high and natural gas futures prices are often elevated.
The economic natural gas futures trading strategy is a bit more complicated, since it requires timing the economic cycle correctly. Buy natural gas futures either directly or through an ETF during an economic downturn, when natural gas demand is low and natural gas futures prices are usually depressed. Sell the natural gas futures when economic activity picks up, when natural gas demand increases and natural gas futures prices are elevated.
The seasonal and economic natural gas trading strategies are fairly reliable, but can be affected by unanticipated supply and demand pressures in the natural gas futures markets due to unseasonable weather and changes in the economy.
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