Polar vortexes and heavy snow are two of the most defining characteristics of the 2013-2014 winter season in the U.S. Bitter cold and harsh weather conditions have taken their toll on parts of the economy, especially when it comes to employment figures. However, when it comes to natural gas prices, the cold weather has propelled the fossil fuel higher, as incessant demand has sent NG on a tear to open up the year [for more natural gas news and analysis subscribe to our free newsletter].
Natural Gas and Piercing Cold
As a quick reminder, when temperatures are cold, the demand and use of heating devices in homes and businesses rises; those devices are typically powered by natural gas. As such, the increased demand for the commodity causes its price to rise, the situation we currently find ourselves in. Natural gas bottomed in early November, just before winter got underway, and there has been no stopping it ever since. The United States Natural Gas Fund (UNG) has jumped nearly 50% from its November bottom, not to mention a gain of more than 20% in 2014.
Colder-than-average temperatures have led to a fruitful trading season for natural gas, and it appears that the bull run still has some legs left. Forecasters have already predicted the spring season to be colder than normal, which has NG traders chomping at the bit for even further gains. Investors should be wary, however, as natural gas is more than likely to experience a nasty pullback once the cold weather finally subsides [see also 25 Ways To Invest In Natural Gas].
What Happens Next for Natural Gas
NG is among the most cyclical commodities on the market and often follows seasonal trends. Unfortunately, the energy resource has bucked the trend this year. Based on five-, 10-, 20- and 30-year averages , NG almost always makes a high in the month of December before trending down until late winter or early spring, where it finds a bottom. This year appears that it will be the opposite, however, as NG’s seasonal high will come (if it has not already) at a time when it usually finds a low. The following chart shows UNG over the trailing six months.
NG will inevitably see a correction once the weather warms up and demand tapers off for some time, but if things heat up too quickly, the demand for natural gas-powered cooling devices could cut that correction short. Keep an eye on the 10-day forecast; that is typically the biggest catalyst for prices. It is not about what the weather is doing today, but about what it will be doing 10 days from now. When temperatures to start their way back up, look for NG to take a hit and be sure to trade accordingly.
Disclosure: No positions at time of writing.