For energy traders, the winter months are some of the most active of the year as demand for commodities like natural gas often skyrockets. With weatherman forecasting this December to be the coldest since 1983, investors could be in for some lucrative plays in the natural gas market. Cold weather has already begun to sweep across the nation, with the Midwest and Northeast–two regions that rely heavily on gas for heating–already experiencing plummeting temperatures since before Thanksgiving [for more commodity news and analysis subscribe to our free newsletter].
This year’s winter is expected to be significantly different from last year’s, which turned out to be one of the warmest in U.S. history; subsequently, natural gas suffered tremendous losses. So far this winter, however, markets have seen natural gas futures rise more than 17% over the trailing one-month period. Analysts attribute record low supply levels with below average temperatures as the main drivers behind natural gas’s recent price movements. According to the National Oceanic and Atmospheric Administration, the U.S. will likely continue to see below-average temperatures in the Northern Plains and the Alaskan Panhandle as well as above-average precipitation in the Northern Rockies, particularly over Montana and northern Wyoming.
Historically, the winter months have been key for natural gas traders. As always, however, timing will be key in making an NG play. To keep on top of the commodity, investors must pay close attention to the EIA’s weekly storage reports, which come out each Wednesday. The EIA also releases a monthly natural gas report, which includes production, supply, consumption, disposition, storage, imports, exports, and price data [see also What Big Banks Are Saying About Commodities in 2014].
The EIA’s short term energy outlook also provides some insight. In its latest report, the EIA stated:
About one-half of U.S. households use natural gas as their primary heating fuel. EIA expects households heating with natural gas to spend an average of $80 (13%) more this winter than last winter. The increase in natural gas expenditures represents a 14% increase in the average U.S. residential price from last winter, with consumption that is slightly lower than last winter nationally. The projected changes in residential natural gas prices this winter range from a 10% increase in the West to a 15% increase in the Northeast. Several factors contribute to this regional variation, including differences in weather patterns, regional changes in production and pipeline capacity, and differences in regulatory constraints in passing price changes through to customers.
Natural gas prices also respond to the 10-day forecast, which can be easily found at the National Weather Service website.
For those wanting to keep track of the commodity, the United States Natural Gas Fund (UNG) is a popular option; the fund has over $950 million in assets under management and an average daily trading volume of over 4.5 million. For a leveraged play, the 3x Long Natural Gas ETN (UGAZ) is your best bet.
Disclosure: No positions at time of writing