Today's Trends: Seasonality May Be Reason Enough to Reconsider Natural Gas

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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wes mullen | Aug. 30, 2010
Sorry but after the tumble NG prices have taken - I cant really understand why it is over-stocked like it is. Why has production gone up? Cant help but wonder who is lying? A good early and cold winter (and I see it coming this year). I got this cartoon picture in my head of some cold old man pushing the thermostat higher up and shivering because he cant get any heat. Maybe, that is the price or did wall street lie to us again about the gulted market? Who knows what to believe these days. Who would guess right after the big BP Oil Spill - all of the sudden now, BP is holding my current production payments claiming an over- payment of $70,000 dating back to 2003. If the same people who figure my payments tells us we have all this gult of NG. I say hold on to your hat the increase is coming and it wont be pretty when it does........

Dave | Aug. 30, 2010
Oversupply is the rule in this industry. Barring any abnormal event, NG will not turn around soon. Most gas producers respond to a drop in price by an increase in production: "maintain cash flow" they cry. Shale gas producers continue to drill even when they know that a profit is impossible at current and predicted prices.

ousaou | Aug. 28, 2010
It is absolutely true that winter weather is the principal demander of NG. This is particularly significant in the Northeast. In urban area the infrastructure required to distribute NG is very cumbersome and expensive. It requires a network of pipes as the LNG tanks may not be supported by urban area municipalities for safety concerns. This is particularly true in newer urban developments. This concerns are none void in the plains and the northwest. Rural areas do have LNG tanks or heating oil. The only possible inconvenient is the deep freeze of minus 60 or more, the limit temperature of boiling propane. The proximity of shale gas to the northeast is a good if more household convert to NG. If this is not the case, the shale gas will increase the supply already abundant, and lower the NG prices. I strongly believe that the GOM spill has brought to light the potential cost of cleanup large oil spill. This is not the case with NG, it burn in place with significantly less cleanup cost and damage to the environment. What is needed is a large new user of NG, LNG, CNG etc. Aside from the power industry big user of NG, the industry showing the most potential for conversion in the trucking industry. The LNG powered truck is not a new technology and is widely used, in Thailand, for example. In the US gas stations where LNG is available is substantially limited. I believe this will not be the case in 3 years. Then NG will compete with oil on an equal bases. This is especially true that the electricity required to power electric car will come from power plant burning NG.

Charles Reynolds | Aug. 27, 2010
I think natural gas is superior to any of the hydrocarbon energy sources. Take the long bet on this one. Once we perfect the Space Elevator we will be able to use LNG in space. If you could find the perfect place for solar or nuclear generation the pipeline to get you the raw gas will pay for itself in 5 years no matter how long it is. The secret is in the optimal discardable container. Think like the CO2 cartidges for air pistols and rifles. I pull into my ExxonMobile and exchange my tank for a new one and I am good for another 1000 miles. And buring LNG is green technology. Making it from coal or fuel oil is not. I like the huge LNG development in NorthWest Austraila.

jay | Aug. 27, 2010
I think that despite the supposed oversupply, the winter temps will obviously have an effect on prices. While the returns on gas futures may not be what they have been in the past, historical returns tend to be a semi-reliable indicator, especially for something so purely seasonal. However, the biggest demand driver is weather, and several sources have forecasted a warmer than average winter for the East coast. They predict a much colder winter for the Midwest, but it seems unlikely this would make up for the massive demand that comes from a cold winter in the Northeast.


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