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The Most Volatile Game in Town

From my experience, June is a great month to take a look at the natural gas market. One reason is the speculative opportunities that can develop because of the weather. It’s hurricane season so there is always the possibility of a natural gas plant shutdown in the Gulf of Mexico. Hot weather can also lead to greater demand for natural gas because of all those air conditioners running on the East Coast and in the Midwest. Sometimes the weather causes a price spike, other times a trend develops because of heat domes that periodically form. If you’re a speculator then you may want to watch for these events.

The natural gas futures market is probably better suited for the speculator who likes the action because it is one of the most volatile games in town. At this time, the market is in a strong uptrend. Because of the severely cold winter, huge demand for heat was able to put a dent in the big supply that had been limiting upside price action.

Weekly August Natural Gas Futures 

This winter, buyers were finally able to break through the $4.320 barrier that had been holding back the market. Now this price is support and the new resistance is $4.891. As of the week-ending June 20, August natural gas futures were trading at $4.6500. This puts the market in a position to take out those highs if the demand is there to burn up more of the supply. And the only way this excess supply will disappear is if there are weather issues in either the form of a hurricane later in the summer, or a prolonged heat spell in either the Midwest or East Coast.

Since this is essentially a bet on the weather, buying natural gas futures is a risky proposition for those who don’t have the time and energy to watch the market on a daily basis. There may be a pay-off if everything works out well, but it does carry some risk. If futures are too risky then one can always consider the options market for bullish natural gas plays. There are numerous ways to play the option market. Some have limited risk, and unlimited upside potential. Some carry unlimited risk and limited upside and still others allow the investor to trade a neutral strategy.

More conservative or traditional investors may want to participate in the natural gas market by investing in natural gas stocks.

Trading stocks with weather as the primary trigger for buys and sells is not suggested because the costs can be prohibitive. Understanding the long-term fundamentals which drive a commodity and a commodity-related stock may be more beneficial to the long-term investor.

Recently, the International Energy Agency (EIA) issued a report which stated China’s natural gas demand will nearly double by 2019. If the projections for greater demand for power in the industrial and transport sectors are valid, in just five years, China natural gas demand is projected to jump to 315 billion cubic meters in that time period, an increase of 90%.

During this five year time period, China may produce some of the natural gas, but the majority will come from imports. This will benefit a few natural gas companies including:

•    Chenier Energy (LNG)
•    Dominion (D)
•    Chart Industries (GTLS)
•    Chevron (CVX)

Weekly Chevron Chart 

Finally, besides appreciation due to rising natural gas prices, some natural gas stocks actually pay investors dividends just like other utilities.

This week, the U.S. Federal Reserve reiterated that interest rates were likely to remain low for a “considerable” time. The Fed also trimmed its monthly asset purchases by another $10 billion for the fifth consecutive time given that U.S. economic growth had rebounded in recent months and the labor market had “generally” showed improvement.

Demand for higher yielding assets jumped on the Fed news sending interest rates lower and stocks higher. This trend is likely to continue until the Fed changes its mind about the strength of the economy and interest rates.

With interest rates at historically low levels and expected to stay low until at least May 2015, investors may want to take a look at natural gas stocks that may benefit from weather-related issues, greater demand from China and pay better yields then you can get at the bank.

Weekly Chesapeake Utilities Chart 

These stocks include AGL Resources Inc. (GAS) which yields 3.70%, Atmos Energy Corp. (ATO) which pays 2.90% and Chesapeake Utilities Corp. (CHK) which is yielding 2.40%.

In conclusion, June is the month to start watching natural gas futures because of speculative opportunities created by the weather, but this year the Fed may have given natural gas stocks a boost. In addition, long-term investors have the opportunity to take advantage of expected demand from China over the next five years.

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