The Seasonality of Natural Gas Consumption
The idea is quite simple. From March to October, the consumption of natural gas is minimal, so starting in the spring, natural gas stockpiling for the next fall begins. Then, from mid-autumn, the cycle of filling the storage ends and the cycle of extracting the stored natural gas begins. In the following chart you can see the dynamics of gas reserves based on data from the US Department of Energy.
Source: https://ir.eia.gov/ngs/ngs.html
The idea is this: we sell gas starting in mid-October and hold it until early spring, when the cold season is over. In the spring, gas demand is at its lowest and prices are also at their lowest, so the process of filling the natural gas storage facilities starts all over again and an active decline in gas prices ends.
Let’s test the hypothesis: natural gas short selling in October and closing this short position in February. We’ll sell the March delivery contract as it falls the most due to minimum demand at this time of year.
Don’t pay too much attention to the deep drawdowns on the chart above. That’s the problem with the selected backtester, as it works with non-normalized data. Therefore, when we short the futures in this backtester, there are always deeper drawdowns and the profits are less uniform than in real trading. The important thing for us here is the global trend of our profits for 31 years.
Let’s visualize the profits in Excel and normalize them:
Profit chart in %
Normalized profit chart in %
Looking at the parameter R^2 (coefficient of determination), which is closer to one, you can see that the normalized chart is much more like a smooth exponential line than the non-normalized profit chart. In real trading, this will be even better and more accurate because we’ll normalize the position once a week, and not once every 4 months as is the case with the backtester. But that’s a topic for another conversation.
Yes, it’s a small advantage, but as I wrote in the first article, the main value of small advantages is not in their profitability, but in their quantity. Small, but stable, fundamentally supported benefits of 2-3% per year – add up to a final return much higher than the market standard 10% per year, and drawdowns will be much lower because a large number of non-correlated benefits stabilize each other.
If you have any remarks or questions, leave a comment below this post or contact me here. I always answer every question.
See you in the following articles and good luck with your trading!
