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Cool Wave: Low Temps Are Causing a Natural Gas Glut

1 August 2014 in Trading Ideas

As most of Europe bakes amid one of the continent’s hottest years on record, a much cooler season in the US has helped to push down the price of natural gas.

The Wall Street Journal reported earlier this week that natural gas prices set a new eight-month low for the fourth time in six sessions as investors continued to focus on low prospects for demand.1

The unseasonably cool summer has allowed consumers to use less air conditioning and the gas-fired electricity that fuels it, the Journal said. Producers put a record string of surpluses into storage, and gas prices have fallen about 20% since mid-June.

 

“If the weather stays mild and we don’t have any power demand, as it has been, then I don’t think we’ve hit a bottom,” said Aaron Calder, senior market analyst at energy-consulting firm Gelber & Associates.

Forecasts still show mild weather, including temperatures as much as 8 degrees below normal, lingering over the center of the country into the second week of August, the Journal said.

The recent slump in natural gas prices has, in turn, appeared to mean good things recently for the stocks of companies that stand to benefit from that trend. The Natural Gas Glut motif has gained 3.1% over the past month. In that same time, the S&P 500 has advanced 0.6%.

So far this year, the motif has increased 12.2%; the S&P 500 is up 7.8%.

Meanwhile, many traders have aligned their money with expectations that natural gas prices will slide even further.

Bloomberg reported earlier this week that hedge funds reduced their net-long positions, or bets on rising prices, by 11% in the week ended July 22, according to the US Commodity Futures Trading Commission. Bullish wagers have declined 51% since February, Bloomberg said.2

Goldman Sachs analysts said this week that mild weather and a record price of inventory gains may push prices lower in the next three months.

Gas inventories, which declined to an 11-year low in late March, have rebounded at the fastest pace since 2001, according to US Energy Information Administration data cited by Bloomberg.

That fact prompted Goldman Sachs into an about-face on future near-term price expectations. “While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to US gas prices in the next three months,” analyst Daniel Quigley wrote in a July 22 note, according to Bloomberg.

There are other variables that can have an impact on natural gas inventories, which can make projections in this sector as fickle as the weather.

1Timothy Puko, “Natural-Gas Prices Set Another Eight-Month Low on Soft Demand,” wsj.com, July 28, 2014.

2Naureen S. Malik, “Bulls Fleeing Natural Gas as Goldman Sees Further Decline,” Bloomberg.com, July 28, 2014, http://www.bloomberg.com/news/2014-07-27/bulls-fleeing-natural-gas-as-goldman-sees-further-decline.html.

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