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Deep Freeze Heats Up Natural Gas Prices

14 February 2014 in Trading Ideas

How cold is it?

Try four-year highs in natural gas prices.

That’s where levels surged to last week on expectations (which turned out to be true) that another wave of colder-than-normal weather would generate even more demand for the heating fuel.

Households across the Midwest and Northeast have consumed record amounts of natural gas this year amid the season’s frigid temperatures. Storage levels are 22.5% below where they were a year ago and 16.6% below the five-year average.1

In fact, consumption has been so high, that since 2005 the five highest days of natural gas consumption all occurred last month.


Those rising prices have also been reflected in the stock prices of natural gas providers. The Shale Gas motif, for example, has gained 6.9% in the past month. The S&P 500 is up 0.2% in the same time period.

Over the past 12 months, the motif has risen 20.4%. The S&P 500 has returned 22.3% in that time frame.

The recent runup in natural gas is a far cry from what had become the new normal of low prices in the wake of the shale gas revolution over the last four or five years. That, in turn, allowed utilities to switch away from coal to natural gas, which has compounded the problem this winter as more generators are burning through gas.

Now, declines in stockpiles have brought back price volatility and reawakened concerns about supply.

As the Financial Times argued, these price swings within the country indicate that the energy boom is a regional phenomenon, not a national one.2

For example, propane (a derivative of natural gas production) is an important heating fuel in rural parts of the Midwest and South, and residential prices are double what they were last year. But not everywhere – it’s $5 a gallon at the main Midwest hub and only $1.50 a gallon on the Gulf Coast.

In the Northeast, the spike of natural gas prices has been worsened by pipeline disparities. The Northeast is a logical market of gas from the Marcellus Shale in nearby Pennsylvania, but a lack of pipeline capacity growth has hurt areas such as Boston, the FT said.

Meanwhile, a Spectra Energy pipeline into New York City has cut volatility there.

All may be somewhat normalized when temperature begin to moderate in the spring. Before then, it’s possible the only people feeling comfortable this winter are those investing in natural gas stocks.

1James Burgess, “Winter storms send natural gas prices to 4-year high,” csmonitor.com, Feb. 6, 2014, http://www.csmonitor.com/Environment/Energy-Voices/2014/0206/Winter-storms-send-natural-gas-prices-to-4-year-high, (accessed Feb. 12, 2014).

2Lex column, “Natural gas: the big chill,” FT.com, Feb. 10, 2014.

Tags: Shale Gas