Cold weather generally means increased demand for natural gas and rising prices. This was true toward the end of February when natural gas was trading at around $2.922 MMBtu. This led to waves of investors and some pundits announcing with excitement that natural gas was about to embark on a bull run. This excitement often stems from biased opinions because those people are long Natty G.
Then you have the technical-analysis crowd stating that there was support at $2.90 MMBtu and resistance at $3.10 MMBtu. This might be accurate in the short run because so many people follow the psychology of the trade. However, if there were a sudden enormous decline in supply, then that support and resistance would mean nothing. The same analysts would state a justification, but the point is that what happens in the real world is what you have to watch.
It’s also imperative that you look at long-term trends as opposed to short-term events such as cold weather. That’s unless you want to day trade the news. But it’s nearly impossible to be successful as an active trader in today’s trading environment. Not only do you have to deal with accumulating trading fees, but you’re often up against much bigger players who can trap you into a trade at a disadvantageous price (an advantageous price for them).
Investing vs. Trading
The dilemma here is that you should not consider VelocityShares 3x Long Natural Gas ETN (UGAZ) if you’re an investor. With a 1.65% expense ratio, you will have close to a 0% chance of being profitable over the long haul. Over three-year and one-year time frames, it has returned -55.96% and -89.42%, respectively.
The Short Option
There is one potential way to make a lot of money on UGAZ, but it’s extremely high risk and not recommended. For entertainment purposes only, since UGAZ is bound to eventually depreciate over the long haul, waiting for any short-term spikes and shorting would have significant potential. However, getting into the short game isn’t recommended. Since you have to buy on margin, you’re playing with fire. If you think losing available capital on an investment is bad, it’s nothing compared to a margin call. You could be forced to sell assets—like a house! Once again, this strategy should only be considered by high-risk investors.
The Long Option
If you choose to go long UGAZ, then it is possible to strike riches if you time it right, though the window is very brief. Since this is a triple-leveraged ETN, it would be possible to make 100% in a very short period of time, but to nail this trade would be very difficult. Over the past thirty years, March has been the best month of the year for natural gas, increasing an average of 4.5%.
On the other hand, natural gas inventories were well above the five-year average. Therefore, oversupply is an issue to watch closely. Unfortunately, there is no clear upside catalyst for natural gas in the near future.
The Bottom Line
Considering oversupply and no clear upside catalyst, natural gas is likely to remain in a bear market — especially as the weather warms up. Even if natural gas were in a bull market, UGAZ wouldn’t be a good investment option. A trade would be a possibility, but it would still be high risk.
Dan Moskowitz does not have any positions in UGAZ.