Piling into Natural Gas = Dumb Money? Follow it anyway.

Over the past few days, traders have been piling into natural gas with the hope that it will converge, as it historically has, with the price of oil. Oil has left natural gas in the dust over the past few months, and investors are betting that natural gas will catch up.

However, it's important to remember the source of the recent spike in oil prices. The increase is largely because of inflation expectations. Investors are looking to oil as a hedge against inflation over the next several years, which is why they've piled in. Oil has not necessarily increased has a result of lower supply or higher demand, and many analysts claim that the fundamentals of oil are actually bearish.

Even if the convergence theory doesn't check out (at least to me), it still might be a good idea to participate in this trade anyway. Natural gas is historically cheap right now, and investors are looking to rotate out of the reflation trade to some extent and diversify their holdings. If UNG breaks out over $16, it could be a nice trade to ride it on up as investors pile in further.

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