Winter Storms Can't Make Natural Gas Bullish
If the first law of economics is that supply and demand will dictate the price of any given good, then any student in the first day of economics class can tell you that when demand surges but prices falls, the culprit behind the commodity is supply. You may find the winter of 2015 wedged into a corner of an economics textbook one day to better explain this phenomenon, since common sense would dictate that the massive storms dumping snow up and down the east coast in record quantities meant that much, much more natural gas would be used for heating homes. Yet while demand has risen to record highs in the US, prices are steadily trickling downwards to the point that investment analysts are confident to say that the current natural gas market is as bearish as they come -- no signs indicate that gas is going to get into second gear anytime soon and start gaining value. Yet there's still ways to profit from natural gas, other than selling it to the residents of Boston to melt 6 feet of snow.
From Milquetoast Winter to Miserable Winter
We haven't yet burned enough fossil fuels to accelerate global warming to the point where snowplow companies go out of business, but the record highs of the month of December indicate that such a glorious freeze-free future isn't as far away as we may think. December of 2014 was warm in temperature and chilly for utilities companies who found that their coffers were much less full than they were in the same month of the prior year when the polar vortex (remember that?) was devastating parts of the nation to sub-zero temperatures. The use of natural gas fell by about 5% in December compared to the previous year while utilities companies experienced a surplus in energy stockpiles. While some of these gas suppliers charge their customers a fixed rate and thus get a better deal, most found themselves rolling with the punches: CF Industries Holding, for instance, saw their stock prices drop by about ten dollars per share from the open of December to the close (currently trading on the New York Stock Exchange as CF at a little over $300 per share). When December turned to January, however, climate change alarmists too had to break out the ice scrapers when massive amounts of snow closed down parts of the east coast; to date it has been the snowiest winter in cities like Rochester's history.
Closing Costs of Natural Gas
While demand has accelerated thanks to a grouchy Mother Nature (or Punxsutawney Phil), costs certainly have not followed suit. In fact, the price of natural gas closed at $2.69 per thousand cubic feet on January 30th, the lowest that the commodity has sunk since 2012. Gas has lost 30% since October, following in the free-fall footsteps of big brother petroleum, and it's looking likely to continue the streak; Goldman Sachs forecasted gas to stabilize at about $3.10 in their annual outlook for 2015 after projecting it to rise to $4 only a year prior. The issue is a backlog, not a problem giving customers what they want. The United States is sitting on the largest stockpile of natural gas in the past three years, with 15% more today than in reserve a year ago. In fact, some utilities companies are praying for yet more snow for fear of winding up maintaining inventory levels that are unmanageable due to the sheer volume of gas that simply is coming in faster than the United States can burn it up even though half of all households use gas for heating or electricity.
More, Better, Faster
The reason that there's so much gas available is simple: the United States is in its post-energy boom. The US produces 30% more natural gas today than we did a decade ago, with the same figure holding true for oil as well -- making the US the leader in both gas and oil by a slim margin over Russia. As more fracking and offshore drilling open up new pockets of energy, the good times are rolling even if the Keystone pipeline isn't. While energy exports have suddenly become a new American institution, there's not much demand for natural gas overseas. In terms of electricity, it's still cheaper to use coal, and those nations that have switched to cheaper fuel are suffering economic woes that limit their spending ability. Europe lost about 40 billion cubic meters' worth of demand for gas -- a full six percent of their total energy use -- over the course of 2014, part of a longer-term trend that saw the continent reach peak saturation in 2008 and decline in the years since. Without markets and with heavy production ongoing, there's a sudden glut of gas that drives prices down even during the months of peak usage.
While the lowered cost of natural gas is good news if you've got to heat a five-bedroom home this winter, it's not particularly reassuring for investors who are looking towards energy futures as a means of making money. Natural gas is in a full-on bear market and the weather isn't going to turn it into a bull market, but there's opportunities nevertheless to profit from the market variation. Shorting natural gas is a good idea as well as a fairly popular idea: short positions on natural gas have risen by about 4% over the course of 2015. You can take the long-only position if you think there's a rebound, but the odds don't suggest it. Instead, look to companies that enjoy a fixed rate for the sales of their gas and aren't subject quite so much to the hammering down of the commodity's value. Ultra Petroleum Corp, for instance (NYSE: UPL) has enjoyed 7% growth in the past three months up to nearly $15 a share. While UPL has taken a hammering in the energy-disastrous year of 2014, it's one of the companies that is best positioned to profit in the current environment by price controls.