Analysts agree, natural gas fundamentals are still bearish. Despite that, Nymex Henry Hub futures went — dare we say — a little crazy this week in terms of volatility. After a massive run-up mid week, the contract closed 8 per cent lower on Thursday.
Here’s a chart from Stephen Schork’s Thursday Schork Report reflecting the extent of the volatility:
Of course, a lot of it can be explained by the roll of the United States Natural Gas Fund this week, with traders positioning themselves on the curve to take advantage of the fund– not always successfully as it turns out, since the fund manoeuvred itself into a host of different contracts to be a little less predictable. As Petromatrix’s Olivier Jakob noted on Thursday the fund appeared to be shedding Natgas swaps on ICE, rather than futures on Nymex, for example.
Further still, as Schork noted on Friday, someone may have outsmarted the collective thinking by another notch still. As he wrote:
We cannot help but think that that plunge in cash values plus the pending roll of the UNG encouraged speculators to take on extra downside exposure in the spot month. Therefore, someone, like a deep-pocketed hedge fund manager, recognized this exposure and began taking appropriate measures last week to ignite a short-covering rally. It worked.
Bloomberg, meanwhile, shed some more light on the extent of the slaughter that may have taken place in the market with their story on Thursday quoting Adam Felesky, chief executive officer of BetaPro Management Inc. As they wrote (our emphasis):
Speculators trying to profit from the U.S. Natural Gas Fund’s roll of futures contracts got “slaughtered” and helped boost volatility as gas prices surged this week, said Adam Felesky, chief executive officer of BetaPro Management Inc.
Speculators shorted October gas, anticipating that the $4 billion gas fund would push prices down when it began selling its October contracts on Sept. 14, said Felesky, whose C$1 billion ($937.1 million) Horizons BetaPro Nymex Natural Gas Bull Plus ETF rolled around the same time as the larger fund.
“The ‘smart money’ was positioned ahead of the roll,” Felesky said. “Everyone was on the same side of the trade. The roll was a non-event, and everybody got slaughtered. I think it’s the pros that got killed.
All of which set the stage for some record volumes in the Nymex natural gas contract on September 15. As the CME noted on Thursday, the number of natural gas futures traded reached 404,450 contracts on the day, surpassing the previous record of 403,106 contracts set on July 24, 2008.
Accordingly, until the UNG’s influence on the market dissipates, we would say it might be worth listening to Olivier Jakob of Petromatrix’s advice — which is stay out of that market completely.