Jylkka: Cold Winter Coming; Buy Natural Gas

December 21, 2009

Chris Jylkka, one of the smartest natural gas traders we know, says we’re in for a frigid January. He recommends warming up with UNG.


Christopher Jylkka is a 12-year expert in the power, gas and oil industry. As the principal and manager of Boston Energy Trading LLC, Jylkka is a registered commodity trading adviser and energy market consultant.

In an interview in September with the closely followed commodity Web site HardAssetsInvestor.com, Jylkka correctly forecast trouble for natural gas prices. Now, he’s turning bullish.

He spoke with IndexUniverse.com Editor Matt Hougan late last week to explain why.

 

IndexUniverse.com: Natural gas has jumped sharply over the past few days. What’s driving prices higher?

Christopher Jylkka,
Boston
Energy Trading (Jylkka):
I’ve been a bear on natural gas prices for most of the last year. But over the past week or so, I’ve changed into a bull.

At this time of year, natural gas pricing is all weather-related. We had the first spate of really cold weather in the Northeast during the first week of December, and, not coincidentally, that was when natural gas started bottoming.

The main reason I’m bullish is the forecast. If you look out about 30 days, there are these things that meteorologists call “teleconnections,” which are recognized patterns of high- and low-pressure systems. They can be thousands of miles apart, but they have a big impact on storms, temperatures and precipitation.

These teleconnections are all pointing to a spell of arctic air moving into the
U.S.
in January, for a period that could last 8-10 weeks. As a result, a lot of meteorologists—including our shop—are calling for a pretty cold winter. I think it could surprise a lot of investors how fast all that spare natural gas will be eaten up if temperatures are as cold as we expect.

IndexUniverse.com: So has the recent strong performance of natural gas been weather-related?

Jylkka: Yes. We’ve seen larger withdrawals from natural gas storage than people expected for two weeks in a row now. You have 8-10 companies predicting the storage numbers to create those estimates, and for the past two weeks, they have missed pretty badly. That’s all due to the cold weather we’ve had recently.

It looks like we’ll have a little warming going into the holidays, and maybe a little slackening of demand. But the long-term forecast looks fairly cold for January and February, and that is bullish for natural gas.

There’s also another thing driving up prices. Industrial production makes up 30 percent of natural gas demand on average. That has turned up ever since it bottomed in August. Right now, gas demand from refineries, fertilizer, ethanol, lumber, wood pulp and paper are all trending up. That only contributes to the weather-related demand.

IndexUniverse.com: Is it really enough to slop up the enormous extra supplies on the market right now? We’ve had historic levels of gas storage.

Jylkka: Let me hedge my bets by saying that any weather forecast looking out 20 days or more is pretty tough, so while most top forecasters are predicting a cold winter, the reality is that no one really knows.

But if we’re right and the forecast turns colder, you’ll see a large effect on the front-month contract for natural gas.

For what it’s worth, natural gas is also breaking out of a short-term downtrend. From a purely technical perspective, gas looks bullish.

 

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