That Looming Natural Gas Rally I Told You About… It’s Here!
Maybe you remember…
In late July, I told you about a looming natural gas rally. At the time, the seemingly abundant commodity was trading just over $3 mmBtu. I proposed natural gas was on the verge of substantial year-end rally where it would shoot into the $5- $6 range.
Well, by the looks of it, that rally is gathering steam…
As you can see, the past month’s been exciting for natural gas bulls. After a pullback in August, the price of this absurdly cheap commodity jumped from $2.75 up to $3.58… a 30% pop.
And judging by recent US Energy Information Administration (EIA) natural gas data, the rally is likely to continue. In fact, with each passing week, it’s looking more likely my lofty $5 price target will come to fruition.
Let me explain why…
Weekly EIA working gas in storage data took analyst by surprise last week. In fact, storage additions for the week of October 5th came in at 72 billion cubic feet (bcf)… well below expectations of an 80 bcf injection. Bullish data continued this week as October 12th storage additions came in at 51bcf.
These weaker than expected weekly storage additions are the key to my bullish thesis. Compare recent inventory data to the same period last year and you’ll find something very interesting.
This week’s 51 bcf storage addition is 50% below the comparable October 20th, 2011 storage addition of 103 bcf!
But that’s just the start of it…
The first two weeks of October are generally when storage additions peak for the year. After that, it’s all down hill as colder weather arrives, heating demand surges, and natural gas inventories start declining.
Let me show you what I mean…
As you can see by the purple line in the chart above, we’re currently matching the storage high of the past two years. But since this year’s weekly storage additions are so much weaker than the last two years, we should see storage levels (red line) turn down quicker once cold temperatures hits.
Speaking of temperatures…
There are two scenarios for the upcoming winter. Scenario one, the US gets a warmer than usual winter, much like last year. In such a case, natural gas prices will give up recent gains and likely plunge to the $2.00 area.
That’s the bearish scenario.
But scenario two is more likely…
The odds are high that this winter will be much colder than the last. In fact, the National Oceanic and Atmospheric Administration (NOAA) recently reported the Northeast and Midwestern US will be 20-27% colder than last year.
Mix this colder forecast with the ongoing weakness in weekly storage additions and we have the potential for a barn-burning natural gas rally into early 2013. After all, according to the EIA, around 50% of US households rely on natural gas for winter heat.
Other analysts are finally catching onto this bullish thesis…
Analysts at Morgan Stanley just placed a $5 price target of their own on natural gas by early 2013. And they went on to say that even if prices rose to that level, producers would be slow to boost output due to “logistical challenges, more attractive oil economics, and higher break-even costs outside the Marcellus.”
Friends, I’ve said it once and I’ll say it again…
Don’t be surprised when natural gas stages a surprisingly strong rally in coming months. And like I’ve said before, the US Natural Gas Fund (UNG) is one of the easiest ways to take advantage of rising natural gas prices.
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Until Next Time,
Justin Bennett
Category: Commodities
