Natural Gas: Ok, Now What?
As you may know, natural gas has been one of the more interesting markets to watch over the past few months. Thanks to bitter and long lasting US cold spell, the commodity surged to multiyear highs at $6.50 mmBtu in mid-February.
But as I mentioned here, anyone bullish of natural gas at those nosebleed levels was asking for trouble.
Not surprisingly, bears brought the commodity back to reality…
It’s been all downhill since the $6.50 high was set on February 24th. Natural gas plunged below $5 by the 26th, and hasn’t recovered since. The commodity has been trading in a tight range around $4.60 for the past two weeks.
Take a look…
As you can see, it has been quite a roller coaster ride for natural gas this winter.
So where do we go from here?
As you’re likely aware, there’s a seasonal tendency for natural gas to drop into the spring months. As temperatures warm, heating demand dwindles, which typically sends prices lower.
But this year the seasonal trend may not be as severe as in years past.
You see, this winter has been extremely tough on US natural gas inventories. The most recent EIA storage report revealed working gas levels were at 1,196 bcf. That’s 43% below last year’s level, and 38% below the 5-year average. What’s more, it’s the lowest storage level for this time of year since 2004.
As a result, it’s very likely that $4.00 will be the new floor for natural gas.
With inventories so depleted, investors will be leery of selling the commodity to drastically lower levels this spring.
Of course, the next few weeks of weather will be watched closely…
As of today, the National Oceanic and Atmospheric Administration (NOAA) is forecasting a slight warming spell for the US in mid-March. If it comes to fruition, natural gas should slowly start drifting towards $4.00.
However, if the government agency revises their forecast to reflect colder temperatures, natural gas could get another late heating season bounce. Look back to March and April of 2013 to see what happens when cold weather sticks around longer than expected.
Bottom line…
Given the 10-year inventory low the natural gas market is currently experiencing, I don’t see the commodity dropping too far below $4.00. Until investors see how fast producers can replenish exhausted natural gas supplies, selling from current levels will likely be limited.
A great way to trade natural gas price swings, without exposing yourself to complicated and risky futures contracts, is via the US Natural Gas Fund (UNG).
Until Next Time,
Justin Bennett
Category: Natural Gas
