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Natural Gas Rally Isn’t Over

With colder winter temperatures still possible, the drop in the price of the heating fuel may be temporary. An ETF play.

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To some, it looks as if the natural gas rally is over. For others, however, it signals an investment opportunity.

After surging to a two-year high of $3.93 per million British thermal units on Dec. 28, prices of the heating fuel plummeted to a nearly one-month low of $3.267 last week, after the worst trading session in almost three years. Forecasts of a mild winter in the U.S. caused the drop. But those willing to wager that the forecasts will give way to chillier expectations and sharply higher prices have an opening. One possible bet would be the United States Natural Gas exchange-traded fund (ticker: UNG).

Of course, investors should bear in mind that commodity trading requires nerves of steel and a gift for timing. If, for example, you made a bullish gas bet going into this winter, you had to do it at just the right moment to profit from a surge in prices that was bookended by big retreats. Natural gas closed at $3.285 Friday, down 12% on the week.

Weather forecasts certainly do change. Recent winters have seen their coldest days occur later in the season, according to the forecasting firm Weather 2000. While March was once the earliest part of spring, it’s now often the latest part of winter. That leaves another two—almost three—months of winter-heating season.

An uptick in demand could provide the catalyst for another rally. When gas surged to nearly $4 at the end of 2016, it wasn’t because of a temporary phenomenon like the arrival of winter. It was because of generational changes just starting to show their effects. Scores of coal-fired power plants have closed, replaced with natural-gas-fueled successors. Exports are surging. And more and more gas production has moved onshore, where it can be disrupted by freezing weather.

THOSE CHANGES are starting to ease the market’s chronic oversupply of recent years. In the three weeks of mid-December, just shy of 600 billion cubic feet of gas were taken out of storage to meet demand. That broke a more than 20-year-old record, for a time of year when far less than 400 bcf of gas is typically withdrawn from storage.

“That’s a really big number,” says Kyle Cooper, a consultant for the Ion Energy Group in Houston. “It was cool, but not record cold.”

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Written by Timothy Puko

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