Cold weather has blanketed the U.S., and record snowfall has crushed several areas of the country. This has sparked ideas for several winter-themed investments, but the one I like the most right now is the United States Natural Gas Fund, LP (UNG).
Click to Enlarge Natural gas historically has seen temporary price increases amid large drops in average temperature, and … well, this November has been unusually cold, with the potential for the chill to remain in place.
Meanwhile, thanks to large increases in production of both petroleum and natural gas thanks to fracking, limited pipeline capacity has kept natural gas inventories at below average levels.
Should the cold weather continue, natural gas could continue to spike, and possibly drive the UNG up by as much as 20%.
Follow the Weather
On Tuesday, the National Oceanic and Atmospheric Administration updated its eight- to 14-day forecast to show below-normal temperatures throughout the middle portion of the U.S.. The cold Canadian air is being forced down to the southern U.S., creating unusually unseasonable temperatures.
Weather patterns flow in two distinct ways. There are zonal weather flows, where the winds blow from west to east in a smooth horizontal pattern, and there are ridge-trough patterns, where airflows have a wave-like feature. This ridge-trough pattern is reflected in the NOAA map above. You can see above-normal temperatures on the West Coast in Alaska and California as warm weather pushes upward. This in turn allows the colder, drier air from Canada to dip down to the tips of the U.S. The pattern is completed by warm air again moving up on the East Coast into New York and New England.
This type of pattern can persist throughout the entire winter, driving up the demand for heating fuels.
Natural Gas Prices Should Head Higher
Click to Enlarge The Midwest and Southeast states predominantly use natural gas to generate heat, and according to the Energy Information Administration (EIA), heating demand for both residential and commercial consumption hit records in November.
The EIA also reported in its latest estimate that gas in storage was 3,611 Bcf as of Friday, Nov. 7, a net increase of 40 Bcf from the prior week. Natural gas inventories are 220 Bcf less than last year at this time and 237 Bcf below the five-year average. And when the EIA next reports, expect to see the upward trajectory of inventory increases come to a halt.
With natural gas stores below the five-year average and the potential for a ridge-trough cold weather pattern to drive increasing heating demand, prices could be forced higher. Hedge fund traders already are catching on to this and have added to long positions in futures and options, according to the latest commitment of traders report. According to the Commodity Futures Trading Commission, managed money increased long positions in Ice Henry Hub futures and options by 79,943 contracts, while increasing short position by 10,351. Long positions in futures and options now outweigh short positions 414,040 to 214,006.
How to Profit
The most direct way to invest in higher natural gas prices is to purchase the UNG fund. This ETF holds nearby and deferred natural gas futures, and attempts to achieve similar returns.
The technical picture for the UNG is positive. The 20-day moving average is poised to cross above the 50-day moving average which means that momentum is in the process of moving higher. Prices have been rangebound, and the October low of $19 is a prudent stop-loss level.
Buy at current prices. The UNG could easily test the 2014 highs near $28 per share, generating a robust 20% return.
As of this writing, David Becker did not hold a position in any of the aforementioned securities.
