Last update 06 May, 2020
This article is methodological background for Oilgasfund hedge fund at https://collective2.com/details/126786783
Actual spread F1 – F12 is -27% vs -10% (its long term average). Based on its current level and historical observation Natural gas coming out from a bearish zone and going to move forward on a flat trajectory with signs of price rebound and easing of spread up to – 10% within next 6 months.
Most active bearish phase in natural gas price is over. Oilgasfund portfolio at collective2.com will start to reduce its exposure in short sell of UNG . Despite that price very likely coming to lowest level UNG long term long position and UNG long as well still too far from optimal condition to open long position. Huge contango will be preserved at least next 6 – 9 months . Contango mitigation possible in case of stockpiles surplus will gone. At least until winter time surplus is most likely.
Spread explanation and its historical observation
Natural Gas continues its decline in the frame of long-term bearish formation. Using the cyclical nature of natural gas price based on rollover yield dynamic of futures in Natgas can be made the assumption that this long-term downtrend will come to the end in the next year. There is a model to forecast cycle formation and its maturity in commodities based on inventories level in storage and rollover yield very closely correlated to uptrend or downtrend dynamic of natural gas prices.
OilGasFund tradable at Collective2 as copy fund remains short position in natural gas as part of contango monetization strategy. The accumulation of short position has been initiated using introduced below model that casting signals – market coming to the top of the price if the following condition fulfilled
F1 – F 12 spread is above 0. This is a key aspect of a quantitative model that OG uses due to the strong predictive ability for spread to reflect the long-term price tendency.
Another source of structural analysis of bearish – bullish phase is COT (commitments of traders) that also turned into a bearish zone.
As you may see from plotted below chart, the huge spike occurred and created significant directional risk for short position during the last winter that was biggest for last 15 years.
Accumulation periods for short position introduced by the configuration of Futures spread is above 0. On the chart those period introduced by the peaks of the zigzagged curve. In opposite situation- release profit periods is troughs of this sinusoidal curve and usually, it varies from 12 to 24 month from the tops. Using that model I going to start to close short position and to reduce short starting of the next year.
To define optimal time to catch a profit will be associated also with COT analysis and model of the exponential growth of UNG (here is details and link to article).