How To Ride The Natural Gas Boom

By Casey Murphy | May 15, 2014 AAA

It may come as a surprise to many that since January 2013 natural gas has reigned as king of the energy markets. Its price has risen an impressive 48.25% over that time, which is way ahead of West Texas intermediate crude oil (8.60%), heating oil (-3.95%) and unleaded gasoline (3.83%). In this article, we’ll take a closer look at financial instruments that track the price of natural gas as well as related equities. The instruments mentioned below are a good starting point for any trader looking to trade natural gas regardless of their experience. If you need a quick refresher, check out Commodities: Natural Gas.

Trading Natural Gas

For traders who do not have a futures account, the United States Natural Gas ETF (NYSE Arca:UNG) is the most popular product for trading natural gas prices. The investment seeks to replicate the performance of natural gas – net of fees and expenses – by trading futures that trade on the NYMEX.

As you can see from the chart below, the golden crossover in January signaled the beginning of a long-term uptrend. The rally became overextended in late January when the relative strength index (RSI) moved above 70. It wouldn’t be surprising to see the price move into a period of consolidation before continuing its longer-term move higher. Key support is near the 200-day moving average, which is currently sitting at $21.39. For traders who wish to mitigate risk, it may be prudent to wait until the price tightens the gap between its current level and the 200-day moving average before taking a position. 

Leveraging A Position In Natural Gas

Traders who want to incorporate leverage into their positions may want to take a closer look at ProShares Ultra DJ-UBS Natural Gas ETF (NYSE Arca:BOIL). This ETF seeks to match, before expenses and fees, twice the daily performance of the Dow Jones-UBS Natural Gas Sub-Index. The fund trades with a relatively low expense ratio of 0.95%. As you can see from the chart below, the price action is much more volatile than UNG. The recent decline in volume suggests that traders are unsure of the near-term direction and are likely to wait on the sidelines until the next major trading signal. For more, check out Day Trading Strategies For Beginners.

For traders who want to pile on the risk, there are a host of triple-leveraged ETFs. These ETFs are thinly traded relative to the others and should be used with extreme caution. Common choices in this area include The Direxion Daily Natural Gas Related Bull 3x Shares ETF (NYSE Arca:GASL) and the VelocityShares 3x Long Natural Gas ETN (NYSE Arca:UGAZ).

Natural Gas Stocks

In 2010, Irving, Texas-based Exxon Mobil Corp. (NYSE:XOM) purchased XTO Energy for $31 billion and as a result became the largest natural gas producer in the United States. When it comes to petroleum products, Exxon is the 800-pound gorilla in the room. Positions in XOM will increase exposure to the entire petroleum industry and the company will undoubtedly be one of the biggest beneficiaries of higher natural gas prices. Other companies with significant interests in natural gas include London-based BP PLC (NYSE:BP), Oklahoma City, Okla.-based Chesapeake Energy Corp. (NYSE:CHK) and Anadarko Petroleum Corp., based in The Woodlands, Texas, (NYSE:APC). For more, check out Top 5 Natural Gas Producers.

The Bottom Line

Fast-rising natural gas prices have made it an exciting place to invest. As shown in this article, there are many products and companies available for traders seeking to increase exposure. ETFs such as the United States Natural Gas ETF (UNG) were designed to track the performance of the underlying asset. Other leveraged funds were designed to double or even triple the performance of natural gas. For those want to increase indirect exposure there are also many petroleum companies, such as Exxon Mobil, that have significant interests. For more on this topic, check out A Natural Gas Primer.

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