Summer Heat Causes Spike In Natural Gas Demand

The bulls are out in full force now that warmer weather forecasts across the US have permeated the markets. Temperatures from the North East to the eastern Midwest are expected to be above normal for the next 6-10 days. Warmer temperatures also stabilize sentiment among speculators in the natural gas market. Warmer temperatures are forecast for large parts of Texas and across stretches of the West Coast from Washington through California. Overall, the mercury levels are higher across much of the US for the coming two week period, and this bodes well for natural gas companies, stocks and futures.

Natural Gas Inventories

Recently released data shows that natural gas storage supplies in the US increased by 32 billion ft³ – 10 billion ft³ lower than the expected figure. The EIA reported that 2.912 trillion ft³ of natural gas storage exists in the US as of early August – 22.5 percentage points more than the same period a year ago. This figure is also 2.2 percentage points higher than the 5-year average for July and August. It's interesting to point out that the next report by the Energy Information Administration (EIA) on August 13 will likely reveal an increase of 57 billion ft³ for the week that ended on Friday, August 7. But temperatures will not be rising uniformly across the US, as cooler temps across the Northwest, Northeast and the Great Lakes region are forecast through August 20, 2015.

The weather forecast certainly translated into higher prices for gas futures for delivery in September. On Monday, 10 August 2015, prices briefly jumped $0.05 to $2.85. It wasn't only the natural gas markets that rose, it was oil markets too. But I still believe that caution is the order of the day with commodities like crude oil, natural gas, iron ore, copper and the like. The fact of the matter is that we have more to contend with than rising temperatures alone. These are some of the issues that should be factored into any trades or investments vis-a-vis natural gas:

• Oversupply in commodity markets is keeping prices low
• Global economic weakness limits the personal and industry usage of natural gas and other commodities like crude oil
• The gradual decline in China's economic performance is a harbinger of lower commodities prices
• The likelihood of an appreciation or a depreciation in the current price of natural gas is slim, since major market movers are not initiating new positions

However now that the weather aficionados have made their forecasts for the coming days, it would be foolhardy not to take short-term bullish positions on natural gas. The market is bound to advance in coming days, and those who cash in with binary call options stand to make significant profits off the seasonal temperature variations. Top investment analysts all point towards bullish sentiment for natural gas over the short-term.

The facts simply speak for themselves.

During summer months demand for natural gas increases because people across the US are running their air-conditioners 24/7 and it also represents approximately 25% of electricity generated in the country. The next stop for traders is likely the $2.92 level which has proven to be a strong resistance level for this commodity. In the late afternoon trading session on Monday, GMT time, natural gas was trading at $2.8360 – markedly higher than the $2.80 handle, but less than the $2.85 surge recorded earlier in the day.

The rise in natural gas inventories (as of July 31, 2015) is a strong indication that one of two things is happening: Demand is declining or Supply is increasing. However up until recently the reason why inventories were increasing was a mild weather forecast across the country. Prices are negatively impacted by cooler temperatures. The increased stockpile of natural gas resources will naturally add downward pressure on to the price of this commodity, giving ammunition to bearish traders overthe long-term. It should also be pointed out that for the week ending Friday, August 7, Baker Hughes announced that its rig count increased by 4. Now the US natural gas rig count is 213 – up 4 times in the past 2 1/2 months. Plunging natural gas prices have seen a major reduction in the number of natural gas rigs in operation in the US from 318 back in 2014, to just 213 today. However, the natural gas market moves towards price equilibrium by reducing supply and waiting for demand to catchup. As an investor you should remember that the energy sector is highly volatile, and your best bet is to trade natural gas in the short term. My advice is simple: check the weather forecast, check the latest economic data coming out of China, and see what the market makers are saying about energy ETFs.