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Natural Gas Usage
The Smart Profits Report: Issue #354
Friday, September 15, 2006
Natural Gas Usage: What’s In Store For Natural Gas Prices This Year?
By Jim Stanton
Advisory Panelist, Mt. Vernon Research
Ever since I was a kid, I’ve lived in the northeast United States. And looking at the miserable wet weather in Washington, D.C. today reminds me that colder temperatures are just around the corner.
Colder weather also reminds me that I’ll be firing up my gas furnace again soon - an event that always causes some concern for natural gas usage in today’s climate of rising energy and heating prices.
Of course, one look at what has unfolded in the natural gas trading pit since the beginning of the year has some pundits proclaiming, “The End of Sticker Shock for Natural Gas Prices.”
But don’t be fooled. A closer look at the charts tells a different story…
Why a 50% Plunge To 2-Year Low Could Be a False Dawn
Currently, the most actively traded natural gas contract is the October futures. As you can see from the daily chart below, this contract traded over $11.30 back in December 2005, but has plummeted by almost 50% since then. Prices today fell to $4.89 - the lowest since September 16, 2004.
Chart Courtesy of Trade Navigator Software
Okay, now for the good news: By making a new low, if the weather stays mild for the next couple of weeks, prices should drop down to my next support level at $4.85.
Now for the downside: While at first glance, this might suggest that we’ll see much lower gas bills this winter, if we dig a little deeper, the October Natural Gas chart could be misleading for three reasons.
Three Factors That Could Lead to Higher Natural Gas Prices
- Seasonal Low Followed by Higher Prices: Take a look at the two sets of red stars on the chart. They represent the price of natural gas in September 2004 and September 2005. As you can see, prices moved higher around this time of year as we head into the winter months. Looking at a longer-term chart, natural gas historically tends to put in a seasonal low around this time of year.
- Current Natural Gas Demand Is Low… For Now: One of the reasons why natural gas prices have sunk to current levels is because demand and usage at this time of year is low. But if you take a look at the natural gas contracts during the coldest months of the year (December-February), it paints a different picture. The current average price of those three monthly contracts is around $10 - a price that will fluctuate, depending on the longer-term weather forecast. Simply put, if we’re in store for a colder-than-expected winter, demand increases, and prices could take off again.
- Bullish Consolidation Pattern On AMEX Natural Gas Stock Index: The chart below shows the weekly performance of the AMEX Natural Gas Stock Index (AMEX: ^XNG). This index has soared steadily over the past few years, but has remained stuck in a consolidation pattern (trading range) since October 2005, and has held up well compared to the October Natural Gas contract. But just six weeks ago, ^XNG made new highs, which tells me that the pattern is probably a bullish consolidation pattern. That means we could be set for higher prices over the longer-term.
Chart Courtesy of Trade Navigator Software
If You’re Looking For Natural Gas Stocks, Watch These Levels First
Despite the change in seasons benefiting an outdoorsman like myself, and new seasonal lows for the October contract, I’m not counting on my gas bills being much cheaper in the colder months that lie ahead.
That’s why September is a pivotal month. Last week, the ^XNG put in a negative “outside” week (higher highs, lower lows, and a lower close than the previous week). This usually means further selling is in the cards, at least over the near-term.
The uptrend line on the chart comes in around 390. But the most bearish, near-term scenario could take the index down to test the June lows in the 370 area. The 200-day moving average comes in around 412.
With natural gas having hit its historical seasonal low, and some continued short-term weakness still probable, keep an eye on these levels in the weeks ahead if you’re looking to add some pure play natural gas stocks to your portfolio.
Good Trading,
Jim Stanton
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Today’s Smart Profits Cribsheet
- Back on July 27, Mt. Vernon Research Chairman Karim Rahemtulla offered Smart Profits Report readers two ways to profit from the natural gas market. Find out what they are, and read the rest of his natural gas analysis in Smart Profits #336: Natural Gas Prices: The Natural Gas Market is Set to LEAP in the Months Ahead.
- Don’t forget to peruse our Smart Profits Glossary, chock full of over 175 option and stock terms for the savvy investors, like “bearish” and “trend” found in today’s article.
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- Commodities: How to Create Your Own “Mini Hedge Fund”
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- Technical Indicators: How to Overcome the “Evil Twins of Trading”
