It’s business as usual in the energy pits, and traders continue to overreact to every piece of data. This week’s Energy Information Administration report showed a decline of 173 billion cubic feet in U.S. nat gas inventories. That decline brings the inventory level to 2.197 bcf, only 0.6% below the figure last year. After running well below last year’s and the five-year average level of inventories, withdrawals of natgas in the U.S. have slowed in recent weeks.
While it may seem as if a crisis was averted and the widespread natural gas shortages that seemed likely in October simply did not occur, I have to reiterate that is natural gas we are talking about. The figures released by the EIA are reported on a one week lag, and thus today’s report comprehended the data for the week ending January 25th.
Drilling down beyond the headline withdrawal figure, I looked into the EIA’s temperature data (sourced from NOAA) and found an interesting pattern. As of last Friday, the US had actually produced fewer heating degree days in the winter of 2018-2019 than it did last year. The US had produced only 214 heating degree days on a national average basis, 12 days below normal for this time of year and 14 days below last year’s figure. A sharp decline in each of the four Midwest subregions offset increases in the New England, Middle Atlantic and Pacific regions.
Remember though, those figures are reported with a one-week lag, and thus do not include this week’s record–and unfortunately fatal in several cases–cold across the Midwest.
Remember also the term heating degree days is meant as reference point, and is not an actual count of days. Since HDDs are based on a mean temperature of 65 degrees Fahrenheit and are usually calculated on a monthly aggregate, it is quite easy to accumulate a huge number of days during a cold snap. A day with a high of 10 degrees and a low of 0 would produce a heating degree day figure of 60, for instance. I think the folks in Chicago would take such a day about now.
So clearly the -70 degree Fahrenheit windchills experienced in Chicago are driving residential heating demand for natural gas. Also, reports of extraordinary residential demand in Minnesota–so much so that Xcel Energy advised consumers to turn down thermostats—increase my confidence that next week’s EIA HDD figures will have jumped back above normal levels for this time of year.
So, the forecast calls for cold temperatures in the Northeast again through Saturday and then a thaw into next week. As with any market, today’s natgas futures price should comprehend all of the current information, but its predictive value can be quite low. My old bones are telling me we will see at least one more chill this winter, bringing natgas supplies once again below their averages.
The way to play that, as I have learned through bitter experience, is not by buying stocks of natgas producers, but buying the commodity itself. If you don’t have access to futures trading, you can buy the UNG daily natgas tracker ETF issued by USCF, or if you are more aggressive, buy the 3x daily natgas tracker ETF, UGAZ, issued by VelocityShares. Also, if you disagree with me completely, instead of commenting on my posts on Twitter you could buy the 3x inverse natgas ETF, DGAZ, also issued by VelocityShares.
Don’t be a hero with such ETF trades, though. Always use limits on these trades and set stop losses. Most of all, stay warm!
The United States Natural Gas Fund L.P. (UNG) was trading at $24.73 per share on Friday afternoon, down $0.55 (-2.18%). Year-to-date, UNG has gained 6.05%, versus a 1.86% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Forbes.