The Commodity Investor: The Trend Is Your Friend For Natural Gas

February 10, 2014

Is it too late to get into natural gas?


Natural gas is back in the news. Thanks to a severe cold blast that’s going through much of North America, particularly in the East Coast and the Midwest, natural gas prices are spiking. Known by insiders in the industry as “gas vegas” due to its sometimes wild and erratic swings, natural gas is certainly living up to its reputation.

A Historical Perspective

When you look at gas prices over the last decade or so, you’re struck by the “boom and bust” cycle that always seems to happen with this commodity. For instance, gas prices jumped from $5/mmbtu in the first half of 2005 to nearly $16/mmbtu in the second half of 2005, only to crash back down to $5/mmbtu in 2006. These extreme price swings are almost unheard of in other commodities such as crude oil, coal or even gold.

What’s more is that 2005-06 wasn’t an isolated incident. After trading sideways in 2006, prices spiked from $6/mmbtu in 2007, peaked at $14/mmbtu in 2008 only to come crashing back down to $3/mmbtu in 2009. No wonder traders affectionately refer to trading natural gas as going to “gas vegas.” The 2010-11 period saw gas prices trending downward from $6/mmbtu to a historical low of $2/mmbtu; although it’s important to note that this period wasn’t affected by any unnaturally violent price swings. Finally, 2012-13 saw an uptick in prices, doubling from $2/mmbtu to $4/mmbtu.

The Current Trend

Which brings us to the start of 2014. Prices began the year at roughly $4/mmbtu and have been going up incrementally, settling as of today at $5.375/mmbtu (Feb. 4). This represents a significant price swing, especially given the price action we’ve seen since the beginning of 2012. Unlike the boom and bust cycles of 2005 and 2007, the price action in natural gas right now is being driven by demand, fueled by the cold weather that’s striking homes and businesses throughout the East Coast and Midwest.

Cold weather has reached many of the lower 48 states, with many counties reporting record cold weather as well as record snow. In some major cities such as New York City, schools and businesses were forced to close as a result of the cold weather. In areas of Pennsylvania, many residents were snowed in because of the large amounts of snow that hit the region.

All of this means demand for natural gas as a key heating commodity is outstripping supply, and therefore causing these price increases.


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