A bubble in natural gas

Spot natural gas prices, 2002 to 2012, weekly

Spot natural gas prices, 2002 to 2012, weekly

I’ve previously written about natural gas, in particular it’s volatility compared to oil. The chart above shows the price of natural gas over the past ten years. Clearly we’re reaching record lows in prices even as supply continues to increase. The chart below details the weekly supply levels of natural gas, and I’ve fitted a red trend line to illustrate whats going on. Current supplies are 60% higher than the five year average supply level, even as prices continue to fall.

Natural Gas in storage, 2002 to 2012, weekly with trendline fitted

Natural Gas in storage, 2002 to 2012, weekly with trendline fitted

Citing falling prices, some suppliers are starting to cut back. So how to trade it? Given the extremes we’re presently trading it leveraged plays are attractive. They combine your money with borrowed money to give you twice the performance of the underlying. If you believe prices are going to rebound ProShares Ultra DJ-UBS Natural Gas would give you twice the return of natural gas prices (less expenses), while if you think prices are going to fall VelocityShares 3x Inv Natural Gas would allow you take a short, leveraged view on the commodity.

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