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How to Profit From a Rise in Natural Gas Prices

Residents of on East Coast of the U.S. are surely eager for spring to arrive after what has been a brutal winter. It seems like every week we are digging out from a new batch of snow. While the Polar Vortex has the mercury dropping, things are heating up elsewhere: in the natural gas market.

Cold weather led to a spike in demand for heating, which means higher consumption levels of natural gas. The surge in demand was reflected in price levels, with the Henry Hub spot price briefly surpassing $8 per million Btu (MMBtu). Local markets fared even worse – spot prices for day-ahead wholesale in the Alogonquin Citygate hub (Boston) blew past $22/MMBtu. Prices in New York were similarly painful. These areas suffered because of inadequate pipeline capacity – bottlenecks that gouge the consumers in the Northeast.


Figure 1 Source: EIA

By all accounts, this is a temporary phenomenon. Spot prices for Henry Hub dropped down to around $4.80-$4.90/MMBtu in the last week of February as temperatures eased, more than $1 cheaper than the prior week. So, we will return to business-as-usual.

But, what will natural gas prices look like for the rest of the year? While we may not see Henry Hub go back above $6/MMBtu anytime soon, the winter of 2014 may have marked the end of cheap gas as we knew it. The “shale gas revolution,” we were told time and time again, ushered in an era of cheap and abundant gas that would last for years. While that may be true as far as it goes, natural gas prices were unsustainably low for quite some time.

Gone are the days of sub-$2 gas, which we saw in the spring of 2012. Natural gas prices are now more than double those levels. Even before the harsh winter, natural gas prices had reached their highest levels in four years. And the drawdown in inventories likely means that prices are not going to suddenly drop precipitously from the $4.80-$5.00 range. Underground storage of natural gas dropped by 250 billion cubic feet in the last week of February to its lowest level since May 2008. This suggests that supplies will remain tight this year. Futures contracts are showing prices near $5/MMBtu for the next several months. Citigroup sees the same thing – it recently revised upwards its projection for average natural gas prices in 2014 to $5/MMBtu.

So what? Well, the shale gas story had grown to be old news, with the “Bakken Blitz” stealing the headlines over the last year…




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