Polar Vortex Cash
How I Made Money Off the Cold Weather
My dear, sweet grandma used to say, "Everyone talks about the weather, but no one does anything about it." This was her idea of good country humor.
Well, today I'm going to tell you how to do something about it. And that something is profit.
Natural gas prices have more than doubled since last summer and really got going after the first of the year. Last week, prices were at $7.70.
But trees don't grow to the sky, and yesterday, the price fell back to $4.55.
The Energy Information Administration reported that operators withdrew 250 billion cubic feet from storage last week, within the range of most analyst estimates. (The previous week's draw was revised slightly lower from 237 to 230.)
But still, the latest withdrawal was well above last year's draw of 127 Bcf and the five-year average draw of 148.
Inventories now stand at 1,443 Bcf, which is 957 Bcf below the year-ago level and 742 Bcf below the five-year average.
They are drawing down natural gas because it's been freaking cold.
Weather or Not
I'm not a meteorologist, but my understanding is that the polar vortex has sucked cold air down from Canada, mixed it with moisture from somewhere, and dumped it as snow in my driveway.
That said, it's almost over. There is one more cold blast expected for the next few days, and then it will warm up. Experts generally refer to this phenomenon as spring.
Last week, the front month futures contract for natural gas was running high at $6.40. But if you go out a few months, it drops down to the $4 range.
There is obviously an expectation that the winter will end and the price of natural gas will normalize around $4.
But it's not a certain bet. Spring doesn't happen every year. In 1816, for example, a volcanic explosion of Mount Tambora threw up a layer of dust that blocked out the sun and resulted in cold temperatures and failed crops. The year was also known as Eighteen Hundred and Froze to Death or the Year Without a Summer.
On the other hand, due to the massive amount of natural gas they have discovered in shale formations in North America, it is a good bet that natural gas will be in the $4 to $5 range for the next two decades until shale gas is played out.
Readers of Crisis and Opportunity had the ability to play this cold-weather bump in natural gas prices by buying the 3x Inverse Natural Gas ETF (NYSE: DGAZ). It goes down when the natural gas price goes up, and vice versa.
At the start of December, natural gas was at $4, and DGAZ was at $12. Last week, when we bought DGAZ, natural gas was over $6, and DGAZ was at $2.83. Today, DGAZ is trading at $3.66. That equals a 29% gain in three days. That's pretty good.
And there are other ways to trade the weather.
If you know there is going to be a drought in Kansas, you can buy the Teucrium Corn Fund (NYSE: CORN) and hope that prices go up. There are also ETFs for cotton (NYSE: BAL), coffee (NYSE: JO), and sugar (NYSE: SGG).
If you think livestock prices are going to go up, you can buy the DJ-UBS Livestock ETF (NYSE: COW). It's up about 20% this year.
But sometimes you are better off going old school with the likes of Tyson Foods (NYSE: TSN). It's doubled this year on the simple premise that more expensive beef creates more chicken sales. Beef is up this year because last winter, corn got so expensive that the cowboys slaughtered their stock to avoid feeding them.
The upshot to all of this is that there is likely a way to profit from just about any event under the heavens as long as you get in at the right time.
If you are a more conservative investor, you can bet on the near certainty that the long-term price of natural gas will be around $4. You do this by owning companies that profit from the booming natural gas industry.
This includes anything from companies that sell sand to frackers to ones that build natural gas ports, or even companies that convert cheap natural gas into expensive jet fuel.
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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