Natural Gas Prices Prepare for Freezing Weather

As we glide into another cold winter, we’re looking to face it with a minimal supply of natural gas. That means natural gas prices this winter are bound to bounce up.

Last winter’s unexpectedly cold winter drained the nation’s supply of natural gas as Americans fought to keep their homes from freezing. As we rolled through a pleasant summer void of any significant heatwaves, there should have been ample opportunity to replenish those supplies.

Unfortunately, that didn’t happen. While there is an abundance of natural gas out there ripe for the taking, it’s a difficult matter of moving it from its source into storage.

This wouldn’t be a huge issue if we weren’t facing another frigid winter, but with another Polar Vortex looming as we plunge further into the cold weather season, things will be tight for natural gas.

To give you an idea of how cold the Polar Vortex will be this winter, autumn officially arrived Monday evening, and we’ve already seen unusually cold weather. The Northern Plains and Great Lakes region have already experienced temperatures that dipped to near-record levels during the first week of September — and they also saw a few snowflakes.

While temperatures have moderated this first week of autumn, you can rest assured temperatures will drop as we plunge further into fall and eventually winter.

I am expecting a winter much like last — not horribly cold by historical standards, but quite a bit colder than we’ve been used to in recent decades.

The Grind on Natural Gas Storage

The Polar Vortex was so powerful that it gave natural-gas supplies a buffer during the summer as regions of the U.S. — particularly east of the Rockies — experienced a cooler summer than normal.

But while the summer was cool and therefore didn’t thrust too heavy a burden upon our natural gas supplies, the drawdown of the commodity last winter season was so significant that we were unable to replenish the supply to sustainable levels.

The Energy Information Agency says storage fell to 800 billion cubic feet by the end of last winter, roughly half of what we had in storage at the close of the previous winter and 55% of the normal ending stockpile.

And since the process of restocking natural gas has been slow, our total supply on hand right now is 12% lower than last year and 13% below the five-year average.

Ironically, the Bakken oil fields of North Dakota are flaring off about 25% of the natural gas produced there because there is no easy way to move it. So, instead of entering the supply chain, the gas is burning off in excess. To the east, the Marcellus shale region expected August production to be 27% greater than the year before. But again, the bulk of that increase was offset by the lack of pipelines able to carry it to storage.

So while natural gas supplies were close to normal at this time last year, the winter was cold enough that we saw storage volumes slip below normal by the middle of November 2013 and continue to drawdown quickly through spring 2014. That leaves us where we are right now — starting out with a gas supply that is 12% below average.

Where does that leave the natural gas markets?

As Markets React to Natural Gas Prices …

Natural gas markets move on perception, so traders will take into account what they know — the weather forecast for a cold winter and the low storage number. For that reason, it’s undeniable that the price of natural gas will move higher.

There are two ways to make money from the short supply of natural gas. One is through the United States Natural Gas ETF (NYSEARCA:UNG), which tracks natural gas futures contracts. The other is to look for pipeline suppliers who stand to make a lot of money on the spot market when there are exceptionally cold waves.

While funds like UNG are regarded as a less-risky means of investing, you have to be aware that UNG futures contracts roll over every month. So as traders switch from one contract to the other each month, a commodity fund like UNG can become a money pit. As a result, you can end up not making a whole lot of money with UNG.

The better route to go is to invest on the supply side. The real money is made in natural gas storage and distribution.

Once we’re through analyzing the data, I will be releasing a specific recommendation on how to make a profit from this winter’s natural gas market to my Weather Trader readers. Just remember — with storage low and need great, stick to investing on the supply side.

There’s a silver lining in every cloud,

Chris Orr
Editor, Weather Trader

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