US Natural Gas Fund Trade's Places

US Natural Gas Fund (UNG) Trade’s Places

They're not just getting rich... They're getting even…

Anyone around long enough to remember the 1983 movie “Trading Places” with Eddie Murphy where two callous brothers (the Dukes) corner the frozen orange juice market? In the end, Winthorpe (Dan Aykroyd)and Billie Ray Valentine (Eddie Murphy) gained advanced knowledge that the supply of orange juice was not harmed by a frost- trading on the information they made a fortune in a few minutes, and left the Dukes broke in the process…

I love this quoted sequence…

[Approaching the New York Commodities Exchange]

Louis Winthorpe III: Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?
Bille Ray Valentine: Yeah, we got to kill the motherfuc... - we got to kill 'em!

This happens every week in the natural gas pit. Volume of the contracts explodes on Thursdays (after the weekly storage numbers come out), dominated by just a few players like the Dukes- only in our world it’s big boys like Goldman Sachs…

U.S. Natural Gas Fund (UNG) is the Winthrope & Billie Ray of the natural gas market (you and I). Only recently have mere mortals been able to enter the world of futures and options- that is without opening margin accounts, and purchasing the perishable contracts- with devestating carnage always just around the corner).

Goldman Sachs, and the other big boys, dislike competition from this new, growing ever larger, competition, so they put out volumes of negative press, and want desperately to kill the fund before it eclipes their God like powers. Along with negative press, they call on their friends at the commodities futures trading commission (CFTC) to help set limits on new players- essentially creating a barrier to entry. This has worked to a point, but, in my opinion, there are way too many smart Winthorpe’s and Billie Ray’s out there to let that happen. As long as there are free markets.

As far as fundamental value: A BTU of oil costs $12.00, a BTU of Natural Gas costs less than $3.00. So, I ask myself, is this glass three quarters empty or one quarter full. Only the Dukes know for sure, but we Billie Ray’s will play the game nevertheless… We'll find a way...

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Comment by Carter on September 15, 2009 at 1:32pm
Edit, I meant to write $15.16 area or so on GAZ, buys @ 13.6's ave.
Comment by Carter on September 15, 2009 at 1:29pm
Taking profits on GAZ right here @ 15.60's (+1.5 points). Should have been up more with what natty did this morning. Disgusted with action on this ETN and how its calculated. Now, natty hitting resistance so flat for now.

Comment by Carter on September 11, 2009 at 11:14pm
Update on UNG... Will begin issuing new shares. Now the premium that I was discussing at 1st of month will dissipate. Let this work out/get digested and then it will be safe to buy and hold longer term.

Comment by Carter on September 11, 2009 at 2:22pm
GAZ trading around 14.6 right now.
Comment by Carter on September 11, 2009 at 2:20pm
Update: Pullback from this morning in natty, still in GAZ, average mid 13.6's. Will put a stop in around 13.5 in case it moves back down. And if stopped out, will buy again on dips.
Comment by Carter on September 10, 2009 at 5:48pm
Here is a chart of XNG, which is an index that tracks some of the big names in independent oil and gas. We are definitely at an inflection point.


Comment by Carter on September 10, 2009 at 5:37pm
I'd also like to do a comment about NG equities which he said to play the good ones instead of the commodity. While this might be good advise for some, I just don't like buying XTO or CHK when I want to play the straight commodity. Because everything is correlated so close lately, you might have a down day in the market and CHK is down, but NG futures are up. I just like pure play, if I want to play CHK or DVN, I'll play those individually.
Comment by Carter on September 10, 2009 at 5:33pm
Cramer just did a piece on why UNG is not a good investment. He talked about the same things I said back on 9/1 about NAV premium, etc. He said to sell on this big run up (UNG) as opposed to being bullish on NG and independent oil and gas in general.

I tend to believe, you should hold here if you are already in, and be ready to get out if the trend turns down again. There is just not a good way to play NG except the futures. Since I don't play futures, I use GAZ which is an ETN (basically a financial instrument) as opposed to UNG, and ETF , which actually owns NG futures. With GAZ, I feel like I get a more pure play on natty with less side effects than UNG. It has its drawbacks like being much less liquid, but if you are not trading in and out 50 times a day, it shouldn't matter.
Comment by Carter on September 10, 2009 at 5:02pm
NG massive run up last few days. Mostly short covering, and don't know if this is the beginning of something bigger, but don't discount anything, because nothing surprises me with this market. Will ride this out and stick with the trend, as long as it lasts. I am using GAZ to play this, was carrying about 10% position into last Thursday, bought earlier last week. Added another 10% on Wed/Thursday of last week. I wanted to add yesterday but price action was not what I wanted to see, so I had to wait until today to add after we took out the highs from yesterday in NG. So I added on with NG about $3.00. Now 50% invested in GAZ, average mid $13.6's. Closed just under $15 on GAZ today, so we will see...

I have been wrong on this before, but today was a real breakout (I think).
Comment by Carter on September 8, 2009 at 12:33am
I think we are getting toward the lower end of the range for NG. Ok to probably scale in here with 20%-30%. Short term chart is ugly and broken...give me more than a 3 day rally at the very least to get me more excited. Still a problem how to play it. I've been using GAZ over UNG... seems the lesser of two evils.

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