The best-performing commodity of 2013, natural gas has fallen to the middle of the pack so far this year. But it hasn't been a quiet ride. Notoriously volatile, at one point price were up by 54 percent, as frigid winter temperatures sent inventories plummeting. Those storage levels eventually bottomed out at 11-year lows last month, and they are now on the rise during the low-demand spring "shoulder season."
There is a stark divergence of opinion when it comes to natural gas, with bulls and bears far apart in their views.
Bull Case: Inventories are at nearly half of normal levels, and it will be nearly impossible to refill them to normal levels near 3,800 bcf by the start of next winter. While natural gas production may be on the rise, the increase won't be as robust as many are hoping for.
Additionally, demand is also on the upswing, which will eat into any output gains. The market must also account for the risk of a hotter-than-normal summer, which will reduce storage builds in the coming months and make it harder to achieve comfortable inventory levels before winter. The risk of a price spike during the peak demand periods of summer and winter are high.
Bear Case: Inventory levels don't matter as production surges. Associated natural gas, a byproduct of drilling for crude oil, will ensure that gas output continues to rise. Moreover, the build-out of pipelines and other infrastructure will lead to a big jump in the amount of natural gas coming to the market from prolific shale plays such as the Marcellus.
A cooler-than-normal summer may dampen demand and lead to outsized injections. Bears expect a record injection season will ensure there are ample natural gas supplies heading into next winter.
Prediction: Natural gas will be supported above $4/mmbtu, with the potential for spikes above $5 in the event of a hot summer. To directly play short-term movements in natural gas prices, traders can take a look at the United States Natural Gas Fund (UNG | B-91). However, long-term-minded investors are better off owning an ETF like First Trust ISE-Revere Natural Gas (FCG | A-99), which holds positions in growing U.S. natural gas producers.
Natural Gas (YTD)