Summertime Income Opportunities in Natural Gas

Summertime Income Opportunities in Natural Gas
Jul

6

2018

Summertime Income Opportunities in Natural Gas

Seasonal Supply Build Sets Stage for High Yield Call Selling

In our March Trade Advisory, we outlined a case for higher natural gas prices into the spring. This was primarily based on the seasonal tendency for natural gas prices to rise as supplies worked towards a low at the end of winter.

Indeed, supplies did continue to decline through the spring –

following typical seasonal norms. Since the low in April, Natural Gas prices have rallied over 10%, recently testing the 3.00 price level in the near month contract.

Kudos to all who sold the puts.

But with July here and summer now in full swing, prices will now be subject to the reverse of that seasonal phenomenon. This will present opportunities for option writers on the other side of this market.

Seasonal Fundamentals Reverse in Summer

After winter ends, distributors begin what is known as “injection season.” This means they begin adding or “injecting” supplies back into storage to replace those used up over the winter heating season. Thus natural gas supplies often begin to build again as warmer summer weather arrives.

Natural gas

With winter heating season well behind them, natural gas distributors are now busy rebuilding supplies.


The historical result has tended to be a seasonal price decline through the summer months.

Why? Economics 101. As supplies again begin to rise, prices have historically tended to fall.

This tendency is illustrated clearly in the seasonal chart below:

December Natural Gas Seasonal

GRAPH: December Natural Gas Seasonal


Natural Gas prices have historically tended to decline into summer as inventories once again begin to build. (*This chart represents averages only. Past performance is not indicative of future results.)


2018 Fundamentals

At the time of this writing, supplies of natural gas stand at 1.817 billion cubic feet (bcf). While this is below last year at this time, it remains well within historical norms. As supply levels appear to be tracking closely with seasonal norms, the Premium Sniper has every reason to expect supplies to continue to build well into autumn.

EIA Working Gas In Storage Current Yr vs. Historical Highs and Lows

GRAPH: EIA Working Gas In Storage


Historically, Natural Gas supplies have tended to start building as summer weather arrives. This has tended to pressure prices. This year’s supply builds appear to be following seasonal norms.


Conclusion and Strategy

With seasonal supply lows now behind us, Natural Gas inventories should continue to build through the Northern Hemisphere summer. Historically, this cyclical supply build has tended to be a bearish force on prices.

With inventory levels appearing to follow a typical seasonal trajectory, selling calls far above current price levels appears to be a high probability income generator this month .

We’ll be positioning managed accounts in a variety of strikes and strategies to take advantage of what we expect will be steady to weaker natural gas prices into summer.

January 2019 Natural Gas

GRAPH: January Natural Gas 2019


Selling the January Natural Gas 4.00 Call Options.


Do it yourself traders can consider selling the January Natural Gas 4.00 calls for premiums of $600 or better. One of the prime advantages of selling commodities options is the ability to sell deep out of the money strikes. One can note that these calls represent distances of 25% out of the money.

Any serious commodity investor must consider following seasonal tendencies – especially in the energy markets. Playing the normal ebb and flow of the supply/demand cycle can be a solid way to build equity in an account.

For more information on managed option selling accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Pack. (Recommended account opening deposit US $1 Million

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