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Winter’s Abundance: Snow, Cold and Natural Gas

18 February 2015 in Trading Ideas

The eastern half of the US is in the throes of mid-winter weather. This past weekend, New Englanders were digging out of their fourth snowstorm in a month, while residents of Arkansas, Missouri and Tennessee were preparing this week for up to 9 inches of snow.

And don’t even ask people in the Midwest about the temperatures at which they’ve recently shivered.

None of this, however, has appeared to have any effect on slowing the decline of natural gas prices.

Earlier this month, investors sent natural gas prices to two-and-a-half-year lows, convinced that abundant supplies and strong production are more than enough to withstand whatever winter has left.

As the Wall Street Journal recently pointed out, the plunge of natural-gas prices is the latest example of a turn in the commodities cycle where robust supplies have sent costs tumbling in markets ranging from oil to sugar. Producers responded to last winter’s price spike by ramping up output. US gas production hit records in 11 consecutive months, flooding the market. As a result, prices have fallen by about 40% since November.1

According to the US Energy Information Administration, inventories were recently sitting at 2.4 trillion cubic feet, up 24% from a year ago and just 1.2% below the five-year average, the EIA said. Last spring, supplies were more than 50% below the five-year average, meaning producers have almost completely made up for last winter’s unusually strong demand, according to the Journal.

At this time last year, half the country was locked in a similar deep freeze, home-heating demand soared and natural-gas futures hit a five-year high. But traders told the Journal that enough gas is now in storage now to meet even a severe freeze. Instead of bidding up prices like they did last year, many have laid bearish bets, anticipating a glut when spring arrives and heating demand eases.

Cheap natural gas is already giving consumers a break on heating bills, particularly in deregulated markets that respond faster to price swings, according to advisory and brokerage firm L5E LLC. US homeowners will save about $150 in gas costs from last year, it said.

But it’s not just homeowners – lower prices also have likely benefitted companies that use natural gas as raw material. And, in turn, investors of those companies have recently seen stock price increases.

The Natural Gas Glut motif, a portfolio of stocks of companies, such as chemicals producers and refiners, that are expected to benefit from lower natural gas prices, has risen 14.7% in the past month. In that same time, the S&P 500 has increased 3.9%.

Over the past 12 months, the motif has risen 17.6%; the S&P 500 is up 17%.

According to the Journal, analysts expect production to keep growing even though producers are drilling less. Genscape, an energy-data service, released figures earlier this month showing that companies it surveyed have said they will cut spending by a combined 27% this year, the Journal said. But the firm still expects gas production to rise by 5% to 72.7 billion cubic feet a day in 2015.

As prices drop, drillers will concentrate on the most-productive spots, letting them cut expenses without lowering output, analysts say. Many companies also must keep producing to generate cash for paying off debt.

Such steady production could mean the rally for stocks getting a boost from low prices may last longer than winter does.

1Timothy Puko, “Natural Gas Sinks Amid Plentiful Supplies,” wsj.com, Feb. 5, 2015.