Morning Thoughts – Down to very little long

My position as of pre-market 1/6/21

I’m going to stay long biased on this market, but of course I don’t always want to carry a heavy long position. Starting out this morning, I’m down to 50 shares of UNL. I’m considering a small short UNG position to offset a little more. Why not simply sell down more UNL?

Natural gas Term Structure 1/5/2021 vs 12/5/2020

UNL, being invested across many contracts, you can see how it might do better, as these contracts are higher from a month ago. Yet, at the same time, UNG should be lower, as prompt pricing is lower than 1 month ago. The difference may not seem like enough to play the spread (long UNL/Short UNG), but over time, this can be the result.

UNG vs UNL June 2020 – 1/6/21 premarket

So with storage to a surplus, as prompt pricing reaches expiration of that contract, the price may fall because there is more than enough gas with no threat to storage. This happens enough over time, it has a tremendous negative impact on UNG, and less of a negative impact on UNL.

When UNG rolls to the next contract, it is 100% of the holding, and if the next contract is priced higher, even by a few cents, UNG rolls out to a higher price. You have to study the timing to see it, but the impact on UNG is negative more often that positive. This also give short biased natgas ETFs, such as KOLD, a boost.

UNL is always holding 12 contiguous contracts, so it only rolls about 8% from prompt to 12 months later. This could also have a negative impact on UNL, such as rolling out of NGH21 at $2.673, and rolling into NGH22 at $2.892. But UNL, more often, sees a positive impact, such as rolling out of NGJ21 at $2.688 to NGJ22 at $2.501. It’s all in the timing of the roll. If you don’t understand me, please don’t think that UNL is going to roll H contract and J contract this week; nor will they roll at the same time. You have a lot to study if you get that impression.

My point is, UNG is impacted negatively on a regular basis, where as UNL is more consistent with the long term market.

I’m out of time. I’ll plan to hold this new positioning for the rest of this week and maybe longer. Oh, and I could have just reduced UNL some instead of shorting UNG. I am going to pay 2.3% of my UNG short position in interest, so I have to at least beat that. Good Luck


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