Consider this your early warning: We’re about to hit the single most important period of the year for natural gas trading.
By the end of April, we’ll know how “real” this rally actually is.
Why is that?
Well, it’s simple.
This winter, gas prices shot above $6. We said that was too high and a pullback was warranted. That pullback is happening as we speak, with prices back down to the low $4s.
The $4 level is critical for a few reasons…
- This is at, or near, the price that separates profit from loss for most producers.
- If natural gas holds at the $4 level, it’ll set a new technical support level for the commodity.
- Most importantly, if natural gas can hold around $4 going into the summer heating season – which starts in late May – demand will kick in again and keep prices at this level.
So what are the chances of natural gas maintaining this key $4 price?
Why is Natural Gas Higher? Step Outside!
Well, for many Americans, the answer is right on their doorstep.
Last summer, demand for natural gas was high, due to the sustained, oppressive heat across much of the country.
However, while this demand pushed natural gas prices up to the $3 range, the huge natural gas surplus stopped the price from moving substantially higher.
Don’t expect a repeat performance this summer.
Today, inventories are much lower than this time last year, due to the long and brutally cold winter. Increased natural gas demand for heating has made a large dent in the reserves.
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It will also signal that prices for next winter will have higher support in the $4 to $5 level.
Indeed, I’m convinced that natural gas prices will stay at or above $4 for the foreseeable future.
That’s because, aside from weather factors, natural gas has support from two other areas…
~Housing: Consumers are using more gas because natural gas is serving more homes. In addition, the housing market has now recovered from a position of above-normal vacancy caused by the financial meltdown in 2008-2009.
~Utilities: In the wake of new regulations on carbon emissions, utilities are switching to natural gas-fired plants to produce their electricity. This has forced a switch from coal to natural gas.
However, gas prices are currently where they should be. While this winter has depleted reserves, there’s still ample supply in the ground and in the marketplace.
So how will this play out in the market?
How to Play the Natural Gas Market This Summer
There’s no doubt that speculators will bid natural gas prices higher than they should be… They always do.
But they’ll be met by sellers who properly understand the natural gas supply-demand equation. And these sellers will keep prices from rising significantly.
In terms of finding a profit opportunity, right now, the odds are tilted in favor of natural gas suppliers.
Granted, the stock is trading well above where it should be.
I only point out its rising share price to underscore the current rally.
Bottom line: Our three- to five-year target for natural gas is $4 to $6. For now, you should buy any dips below $4 and sell any rallies over $6 this summer. The dynamics for much higher prices just aren’t there yet.