Adding further wind to the sails for short sellers is the persistently positive roll yield in the natural gas forward curve. Over the past 12 months, shorts have earned a cumulative return of about $1.08 rolling their positions each month, a substantial profit equal to roughly 25% of the underlying price of gas at current levels. While the forward curve has flattened in recent months, the positive carry persists, and natural gas front-month spreads have demonstrated a consistent tendency to widen as they approach the roll date.
We have been long-term bears on natural gas, and given the overbought condition of the market coupled with recent weather reports calling for above-normal temperatures beginning in April, now is a good opportunity to establish a new short position. Sell May natural gas, placing initial stops at $4.40.