Shorting Natural Gas Is Not A One-Sided Bet, But It Doesn't Make It An Attractive Long Either

May Henry Hub prices have surged over ~10% in the last 2 days. Why? Positioning is offside and traders who think natural gas is a one-way bet will have to learn it the hard way. In an NGF we wrote 3-weeks ago titled, "Natural Gas - Is It Time To Buy?" We wrote:

Is it time to buy?

No, but it is time to stop being bearish on natural gas. There is a pathway to higher prices, but both scenarios are low-probability events today. We need to see a material jump in power burn demand and Lower 48 production to fall below ~99 Bcf/d.

For us, calculus is simple. If we see signs of any of those two variables coming to fruition, we will go long natural gas and natural gas producers. Until then, we continue to urge readers to avoid natural gas exposure.

For traders looking to bet on additional downside in natural gas, you are picking up pennies in front of a train. It's not worth the risk/reward. Even if your bearish scenario turns out to be right, your reward is $0.50/MMBtu, but even in the event you are right and there's a short squeeze, your downside is $0.50/MMBtu. Your risk vs reward is 1 to 1, which makes it an extremely unattractive situation to be in.

This is precisely what's happening to natural gas right now. It's the quintessential short squeeze. Because from every fundamental standpoint you look at, the market 1) doesn't scream tightness and 2) shoulder season is here. You are going to get whipsawed by volatility, and although the bears might be right that injections will be higher than normal going forward, the market doesn't care. It only cares if one side is positioned incorrectly and how it can screw the consensus.