Before the fracking revolution, the most sure-fire trade in the world was to buy natural gas in August and sell it in December.
If there was one thing you could count on in this world, it was that it would be cold in New York City and Chicago during the winter, and the traders would bid up natural gas futures.
In the past 25 years, the price of natural gas has been lower in December than it was in August only five times…
In 1992, 2001, and 2008, it was because of recession. In 1999, it was due to a global sell-off in commodities. In 2011, it was due to oversupply, as natural gas producers produced below cost.
Even after the rules of the domestic natural gas markets have changed, due to high supply, you still have an 80% chance of being right if you go long natural gas prices at this time of year with an eye on selling in December.
I don’t care who you are… those are good odds.
Here are six reasons NG prices are going up from here.
1. Lowered output estimates by the EIA
The U.S. Agency lowered its 2013 natural gas production estimate to 69.89 billion cubic feet a day from last month’s forecast of 69.96 billion.
2. Inventories are lower.
Inventories may reach 3.8 trillion cubic feet at the end of October — but it will still be 130 billion below last year’s level.
3. Consumption keeps hitting new records.
Natural gas use now exceeds the levels of use from before the 2008 crisis in terms of general, broad-based industrial use.
Auto plants use a lot of electricity. Total consumption was at 25.5 million cubic feet in 2012, compared to 23.1 million in 2007.
The United States will export between 1.5 billion and 2 billion cubic feet a day of LNG going forward.
An Energy Department study says exports will raise gas prices as much as $1.02 per 1,000 standard cubic feet from 2010 levels.
5. Recapture of power generation from coal
Following Obama’s war on coal, the price of coal plummeted. When NG climbed to $4.60/mmbtu, many electricity producers found it more cost effective to switch back to coal.
The cycle continues, now that NG has dropped again…
Lower NG prices have again made gas attractive to those utility buyers that have hybrid systems.
Over the long term, all new power plants will be natural gas only. By 2020, this demand will take up five times the levels we now have in storage. Over the shorter term, this new NG demand by power plants will coincide with the cold weather and drive up prices.
6. Winter is coming.
They say that a decline in solar activity combined with ocean-atmosphere patterns in the Pacific and Atlantic will result in below-normal temperatures and above-normal snowfall during most of the winter across much of the United States.
The Farmers Almanac’s Annual Weather Summary for November 2013 to October 2014 just came out.
Now, before you scoff, the FA is North America’s oldest continuously published periodical, and some readers claim it has a 85% win rate…
The Farmers Almanac’s goes on to say:
Winter will be colder than normal, with below-normal precipitation and snowfall in all but the northernmost part of the region. The coldest periods will occur in early to mid- and late December and in early to mid- and late February. The snowiest periods across the north will be in late December, mid- to late January, and in early to mid- and late February.
Granted, the Farmer’s Almanac isn’t enough to put your cash on the barrelhead.
But there is one uncontroversial truth, in the words of Eddard Stark: Winter is coming.
Baring a new recession, I expect NG to be trading between $4.60 and $5.14 by the time the Super Bowl is played in the Meadowlands.
Domestic natural gas producers like Encana (NYSE: ECA) and Chesapeake Energy (NYSE: CHK) should see an increase in sales revenue. And as always, it’s a good idea to invest in natural gas infrastructure — no matter the season.
Until next time,