We explained in our “Managed Futures 2014 Outlook” a few weeks ago that volatility has been contracting for quite a while (much to the chagrin of trend followers and other long volatility type traders), increasing the chance that this compressed spring would ‘uncoil’ at some point in the not too distant future. Well, not too long after – everyone’s favorite energy as of late, Natural Gas, has done just that sort of volatility uncoiling, with the 3 day Average True Range jumping about 200% in the last week!
(Disclaimer: Past performance is not necessarily indicative of future results)
That’s swings of about $5,600 per contract on average the past few days, levels not seen since back in the volatility hay day of 2008/2009. This was enough for the CME to hike Nat Gas margins, Amaranth investors to have some nasty flashbacks, and for us to roll out a bevy of links on Natural Gas last week.The buzz about Natural Gas has spread past a couple articles in major media outlets… President Obama not only mentioned the commodity it in his State of the Union, but made some interesting claims.
“We produce more natural gas than ever before — and nearly everyone’s energy bill is lower because of it.”
According the the EIA, America is producing more Natural Gas than ever before, especially given the recent rise in fracking. If this price move and resulting volatility is just the result of the Polar Vortex, it may be short lived… it will get warmer, right? Please tell us it will, Chiberia is starting to get a little ridiculous (3 straight days of below zero windchill). Or it may be just the beginning of a sustained up trend in Natural Gas prices, a classic uncoiling of the compressed volatility a few years in the making, and Obama’s statement of lower bills could be moot.
For now, we’ll keep cheering it higher for the benefit of commodity trading advisors like Covenant, Quantum Leap, Brandywine Symphony, Quest Alpha, and Sona Trading that are currently holding long positions! There sure seems to be a lot of room to the upside if it can break above the $6.00 mark. Just watch out for that volatility…