Rush towards the danger, embrace the opportunity.
That was my plan for this week... sort of...
When everyone was still "all in" on the obvious in the short oil trade early this week... I opted out, and reversed field on the trade... going from all in short oil to growing a long position.. but, not long oil, and not looking at oil focused ETFs.
A lot of unhappy campers this week trading the long member of the SCO - UCO trading pair.
I've noted previously I didn't like the trading action in SCO. I also haven't liked the nature of the volatility apparent in oil and the oil ETFs the last week... which was an oil market trading problem already, but, when that problem is also paired up with a trading vehicle that's not actually tracking what it is supposed to, as its supposed to ?
I opted out of the trade just because things clearly weren't behaving in a way I considered trade-able...
With the sudden pop in oil the last two days... people were expecting that UCO would perform, as it is supposed to, at 2X or better relative to the oil index that SCO and UCO purport to track. The June contract closed up at around $15 yesterday, traded as high as $17.65 overnight, and, during trading today was up 25%... the high at $20.30. The ETF should have done twice that... should have done 50%... but instead did only half what the index did... up 14% on the day.
Turns out the managers have bailed on their commitment to track the index... and have instead rolled the May contracts over to longer dated contracts... and then apparently "forgot" to mention it to anyone ?
Many disgruntled traders will be looking elsewhere to get re-gruntled...
I note natural gas seems to have put in a major bottom on April 2nd... Higher highs and higher lows since then...
Look at a one month chart for UGAZ... and its been through a few swings... but even with a few $4 to $5 peaks and plunges mixed in, it has mostly traded with a far more predictable pattern than the oil ETFs.
This week it looked ready to repeat the two prior patterns... It had a gap higher on Tuesday just as it had on day 2 in the prior pattern... but rather than continue that pattern, it aborted the pattern on Wednesday ?
Too soon, still, to say that Nat Gas is going to break out from here... but, it is perhaps overdue, as it has been in a downtrend since last year, from long before the recent market fireworks began... and, like oil, has suffered the double pounding from bad days in the stock market, and bad days in the energy markets...
Oil moving higher, today, mostly on the unexpected speed at which production is being shut in now... which has taken pressure off the market's growing storage concern...
Nat Gas, similarly, reported today on the pace of the build in storage... But, unlike the problem in oil on April 20th, gas today reported a number in the build which was exactly in line with what traders thought it should be... just based on the seasonality that drives Nat Gas market dynamics. The shorts hoping to see an oil-like massive build based on "demand destruction" were sorely disappointed. Nat Gas market dynamics just don't subject it to the same risk factors as tie into the demand destruction narrative in the oil markets.
Pair that with the ongoing issue in both oil and gas drilling rigs being idled at a rapid pace, along with the gas fraction from oil wells that are not being drilled also meaning less new gas will be coming online... ?
The contraction in domestic oil production is going to greatly magnify the parallel contraction in gas supply... only in a market that doesn't have the same ready access to alternative sources of supply. The Saudi's aren't going to be able to replace the supply of domestic Nat Gas that isn't being drilled now... while demand for Nat Gas also doesn't have the same drama in the direct connection of price performance tied to the performance of the economy. The different ways gas is distributed and used... not used in transportation... makes it much less economically sensitive to those factors that dominate the oil trade.
Nat gas didn't come close to outperforming oil... today... but, the ETF also didn't surprise anyone... and its holding its 3X leverage... so it didn't actually suffer much in the comparison relative to the shrinking scope of opportunities for investors to trade oil... without trading futures contracts themselves... which few will be able to consider.
In oil... that means no real reason left to trade the oil index ETFs... when oil shares are a better bet on future prices, now, without any of the trading and market risks or the unique contango risks the futures focused ETFs or ETN's suffer.
In Nat Gas, though... the ETFs are intact, the trading pairs still make sense... the extreme in the over-supply risk and the negative price inducing storage shortfalls are absent... while the demand/supply problem of shortage in the future focused pricing dynamic is amplified... to the benefit of the investor...
Fun doesn't really begin in the trade until after Nat Gas crosses above the $2 threshold... which the traders all claim to be the level in market resistance that really matters. The recent (very trade-able) trading patterns are defined by that limit, with a series of tests of that $2 level in April, each of which Nat Gas has failed, only to mount another attempt...
The 3X leverage, from what I observed this week, seems it means a $0.10 swing in the Nat Gas contract price produces roughly a $3 to $4 move in the ETF. Looking at the charts, Nat Gas in April swung from $1.55 to $1.95... the ETF from $20 to $36... $0.40 versus $16... so $0.10 versus $4...
The combination of the virus generated economic shock, the market shock, and the separate energy market shock... and still looming, the new debt driven financial risk factor for the frackers... all appear to converge now in Nat Gas, the events likely to drive a sudden reversal in the years long growth of the correlation in prices with the continually expanding surplus in fracked Nat Gas. Future shortages loom in oil with any economic recovery that drives demand growth greater than and exceeding the supply contraction being generated now. Future shortages in gas don't really depend on the economic recovery happening first... Not driving your car while locked down for the virus... doesn't mean you're also turning the heat off ?
My interpretation of the pattern in the trade yesterday... the reason the prior pattern tied to the serial tests of the $2 price threshold was broken... is that the take down yesterday was mostly intended to fill the gap formed the day before.... rather than leave it dangling out there as a risk countering the sustainability of any near term move higher. In UGAZ the charted lower limit in the gap higher on Tuesday was $29.35. The charted high in the trade today ? That was... $29.34. The odds that issue with the unfilled gap will be "managed" tomorrow seem they are pretty good ?
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