Falling in Love with Natural Gas Again

Natural gas, lovingly referred to as “Natty” by some traders, is known as a market that can quickly make or break fortunes for those that trade it. Attracted by the volatility of the commodity, many inexperienced traders learned the hard way why natural gas is sometimes called the “Widow Maker” trade.

Legendary natural gas trader John Arnold retired at 38 after making billions trading the commodity. His fund, Centaurus made over 300% in 2006. Primarily by betting against a rival hedge fund, Amaranth Advisors, and its reckless 32-year-old trader who blew up the firm by doubling down on risky natural gas bets.

But those days of volatility in the natural gas markets seemed to be a distant memory following the shale revolution in America and the accompanying natural gas supply glut. Indeed, from 2009 until April of this year, the price of natural gas remained rangebound between $1.50 and $6.00.

US Natural Gas Spot Price 1997-2022. Source: US Energy Information Administration‌ ‌

Following the invasion of Ukraine in February, however, Natural Gas in the United States broke out of that range trading at over $9 in June and July. That’s nothing compared to European natural gas markets which have surged, moving from the low €40s in 2021 to over €200 over the last few weeks (chart below). Note: At the time of writing the Euro (€) and USD ($) are near 1:1 parity.

Chart source

These significant price moves present opportunities for traders that can adequately manage risk and have a deep understanding of underlying market dynamics. Further, as countries adjust to a new model of energy scarcity and pricing pressures, we are likely to continue to see volatility across all energy markets. We have also seen energy used as a geopolitical pawn to force action by both allies and adversaries which increases the strategic importance of energy going forward.  

As an investor, if you believe in the continued necessity of fossil energy sources and that volatility is here to stay, having a strategy that takes advantage of, or at least hedges, that energy risk is likely wise.

World consumption of energy and energy share by source. From: bp Statistical Review of World Energy 2022

The global importance of natural gas and its recent volatility make it worth considering in any energy investment strategy.  However, given the volatility in natural gas markets, we believe finding a disciplined capital allocator with a history of properly managing risk is key to finding success–less one is willing to go down the path of Amaranth Advisors and their legendary blowup, mentioned above.

For those interested in learning more about trading the energy markets, and specifically the natural gas markets, UpMarket is excited to provide you access to leadership from Pan Capital Management, a hedge fund specializing in natural gas markets with over $800 million in AUM. That fund has successfully navigated natural gas markets, returning an average of 29% each year to its LPs since the fund’s 2011 founding.

Whether you’re interested in investing in natural gas or simply want to better understand such a critical resource in times of geopolitical uncertainty, we invite you to watch the replay of the discussion about natural gas markets using the link below.

Watch the conversation

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