It is no secret that natural gas has been on the losing end of markets the past few years, as it has been one of the worst-performing assets since the recession began. Many had hoped that the cooldown in the United States at the end of December would drum up demand and lower stockpiles, but that doesn’t appear to be the case. The weather report for the month of January now shows warmer-than-average temperatures, meaning less demand for this fossil fuel and downward pressure on prices [for more natural gas news and analysis subscribe to our free newsletter].
While warmer temperatures are certainly an issue, the production of this energy source is another. With fracking and other technologies making it easier than ever to harvest this resource, the U.S. supply of natural gas is quickly on the rise. Even if temperatures were to be colder than average, a massive supply will still keep prices in the gutter, as stockpiles will remain high. The United States Natural Gas Fund (UNG) slid nearly 5% over the first two trading days of 2013.
Can Natural Gas Turn It Around?
The problem for NG is twofold, as weather and production have combined to hurt the commodity. Cooler temperatures will certainly help relieve some pressure, or a slowdown in production could do the same. NG suffered a similar fate from an exceptionally warm winter in 2012, but the tables turned when the summer came around. The searing heat of last year’s summer allowed natural gas to rally 70% in just a few months, only to slide back during the latter part of the year.
As far as the long term is concerned, natural gas is poised to be a major part of U.S. energy consumption in the coming years, but that may not necessarily translate into gains for the commodity. Should production remain at its staggeringly high pace, NG may find a plateau for an extended period of time [see also Preparing For Economic Headwinds: Bill Gross’ Commodity Picks].
For those looking to profit from the rapid movements of NG, short-term trades are likely your best bet for the time being. Pay close attention to the 10-day forecast as that typically has a heavy weight on NG movements, and be sure to keep an eye on the EIA Natural Gas Inventory report that hits the market every Thursday. Should 2013 turn out to be another warm year, options may be a good bet, or you may want to wait until the summer months kick in and demand spikes as we do our best to keep cool.
Disclosure: No positions at time of writing.