There are a number of similarities between Donald Trump and Natural Gas.
Not only are both a surprise, seemingly sneaking up on us this year to rise to prominence, but like the rhetoric espoused by the president-elect, gas is plentiful and will not go away anytime soon. Even with the odds stacked against them; both have managed to make significant headway in a seemingly improbable, if not impossible way, leaving many bewildered to say the least.
Natural gas is the commodity I started my career on. Some may be surprised by that, but the reality is that it's a commodity that teaches you risk management and respect for the markets like no other. Gas helps you to remain agile in your thoughts and views as much as your trading discipline. You need to think outside the box, and cannot solely rely on historical performance, because the commodity can move faster and further than you've ever imagined.
I remember when people said that gas could never surpass $5, $7, $10 or even $12, but it did. Even after it defied all expectations, they said it could never fall back down to $2, but it did again. Like Trump, many investors are generally unable to fathom gas' trajectory simply because they act on emotion and don't recognize, or simply choose to dismiss, the underlying momentum propelling the commodity further.
This is why the commodity can be so helpful in teaching investors the value of momentum and trend.
Gas makes you learn when to take your chips off the table when risk gets out of line, and can often remind investors that any trend can have its fair share of bumps along the way. When this happens, the best possible recourse is usually to be patient and give your holdings space, looking at them objectively and not allowing emotion to enter into the equation.
When looking to the commodity, given that we started the winter season without weather to support price, gas corrected sharply in October. While this was not unexpected or unhealthy seeing as gas rallied for the better part of 6 months, the news led many to say that winter was over before it even began, causing some to dismiss the commodity altogether. Yet, what happened? Gas continued to hang on despite the bearish news.
At the first sign of winter, the commodity rallied sharply, gaining over 25% since early November. It was simply too early in the heating season to throw in the towel. As always, winter will come, and like Trump, many may not like it, but it is a reality. We just have to deal with it and try to use the underlying trends to our advantage.
Now, with high storage levels, the nature of the gas market's underlying balance is completely different than it was a year ago. The U.S. domestic supply is currently running close to 2 Bcf/d lower, and demand is also somewhat different with gas-fired power generation more entrenched, industrial demand picking up, and exports of LNG ramping up. Furthermore, Bentek released a study which suggests that if there is no rebound in northeast drilling activity in 2017, northeast gas production may be more than 3 Bcf/d lower than current output levels next year.
So how do you take advantage of this? At Auspice, we believe that if you have a view on a commodity, find an instrument to express that view directly and cleanly. For this, we recommend commodity-based ETFs, the easiest and most effective way for most investors to express a "pure play" opinion.
The rewards may be there -- if you look at the performance during the summer season, the Canadian Gas Index (CGIER) rallied over 36%. While some resource-based "gassy" equities have performed as well or better than the commodity itself, these are few and far in between, and can be very hard to distinguish given that they are tied to a myriad of other factors. Even well regarded products like junior natural gas producer ETFs underperformed the commodity itself during this period because of their other non-commodity related characteristics.
How does this all relate to Trump?
While his performance as President is yet to be determined, and he has shocked, surprised, and exploded into reality, make no mistake, he isn't going away. Just like trends in gas, it is important to understand reality versus rhetoric and adjust your plans accordingly. Don't simply hide and ignore the information right in front of you. This can hurt. If you have a view, take it square on and manage the risks accordingly. All it ever needs is a catalyst to explode!
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