Before we speak to the chart above, a foreword regarding the seasonality of natural gas seems warranted. Evidenced by the ebb and flow of natural gas storage in the United States, demand seasonality is a foregone conclusion. In the winter months, when demand is highest due to heating requirements, storage levels are drawn down and typically natural gas prices are their strongest. For these reasons we thought it would make sense to see how Mr. Market prepares for this yearly occurrence.
By observing pricing patterns for natural gas futures coming out of the summer months, we found a striking pattern. Over the past ten years, natural gas futures have rallied eight times during the subsequent nine weeks following the last Friday in August. In six of eight periods the average returns well exceeded the overall average of ten-week returns since the beginning of the decade. Specifically, the return for natural gas front month futures over the nine weeks following August was a 24% surge on average. This is six times the average ten-week forward return of 4% for all dates since 2000.
The reliable uptick in demand that occurs each winter (and the likelihood natural gas prices will rise ahead of this seasonality) is responsible for investors bidding up natural gas futures as the seasons change from summer to fall, in our opinion. Recently, pundits have been trumpeting a fundamental story ad nauseum regarding the oversupply of natural gas (due to unfettered production and high storage levels) in making a helplessly discouraging case about where natural gas prices headed. One of the nicer terms used relating to a near-term trade for natural gas futures has been to call it "dead money." To us this looks like some overcrowding in the bear camp with the herd beginning to believe that history will not repeat this time. Time will tell over the next nine-weeks whether these poor fundamentals —that have been in place since 2008 —do in fact beat the odds this season.
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