January 2, 2018
rcm-alternatives
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Our commute to work this morning was something brutal in Chicago: -3 degrees with a feel like temperature of -17. It’s Winter in Chicago, which means it’s that time of year where it’s painful to open the heating bill. But we all know it’s coming… Natural Gas demand goes up in the winter, and prices rise in response. As a cold front hits the majority of the U.S., Natural gas prices are back about 3.00 as the country is officially using more natural gas the even the infamous polar vortex via Bloomberg:
America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago.
This might seem obvious to some; this chart shows the seasonality of commodities. For grains, there’s planting and harvesting season, and whether floods or storms impact crops, and then there’s cold weather and demand for natural gas in the winter. This chart does a good job at showing how the seasons impact Natural Gas use, but we are curious about how prices moved in each month over the long term? Introducing Commodity Seasonality, one of the only places on the internet that displays average monthly performance for each commodity across long time periods.
(Disclaimer: Past performance is not necessarily indicative of future results)
Demand might be up at the beginning of each year since 2007, but if you go back and look at the past 20 years, it doesn’t mean that prices are going to rise. We asked Adam Collins, the guy behind the Commodity Seasonality website and this is what he had to say about the Natural Gas chart above:
“The pictured seasonality data is for rolling a front-month position in natural gas futures based on open interest. Front-month natural gas seasonality tends to lean negative in most months. This is because the front part of the natural gas curve is typically in contango, meaning futures rise in price further out in time. This forces traders to pay up for the more expensive deferred contract to maintain long exposure. Over the long term, this constant contango has a larger influence than most short-term price seasonality.”
Quants in the Alternative Investment space will build entire strategies around this, including risk perimeters which are important in markets with large price movements. And if you think a natural gas ETF might be a good alternative, it seems no matter which one you pick, you are probably going to lose.
If you’re looking to understand the seasonality of commodity markets, we think Commodity Seasonality is a good place to start. As a side note, if you’re thinking of betting a chunk of cash on this, go read about Amaranth first.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
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