By James Cordier
Natural gas can be a great market to trade this time of year. Hurricane season is still months away, and with U.S. gas demand met almost entirely from domestic production, the market is somewhat insulated from geopolitical events. This allows the market to take price direction almost exclusively from core supply/demand fundamentals.
There is no shortage of natural gas at the retail level right now. In fact, nat-gas prices plunging by 40% since the December highs indicate one thing: The market believes supplies are more than adequate to meet demand needs for the rest of heating season.
May 2015 Natural Gas
Yet, investors not familiar with the demand cycles of energies may find it curious that supplies are now at their lowest levels of the year. How can this be? Doesn't low supply mean higher prices?
The answer is, yes and no. For low supply means little, if demand is lower.
The natural-gas demand cycle
In the futures markets, commodities take their price cues from demand at the wholesale level. And while retail demand for natural gas may be highest in winter, March wholesale demand is virtually nil.
…."heating season" as it is known amongst gas traders, ends this month. And April gives way to"injection" season.
This is because wholesalers (or distributors), spend the months leading up to demand season building their inventories. This means buying it from producers. Socking away inventories means rising demand at the wholesale level. This often serves as a bullish influence to prices.
Once supplies are deemed adequate, the wholesalers spend their time selling their gas to retail gas distributors. During this time, there is little demand at the wholesale level. That's where we are now.
But "heating season" as it is known amongst gas traders,ends this month. And April gives way to "injection" season.
During injection season, the cycle begins anew as wholesalers once again begin injecting gas into storage. This means increased demand from producers at the wholesale level and can often correspond with higher prices in the natural gas market during the spring. This is evidenced in the previous chart.
While there is no guarantee that higher prices will occur this year, we feel the fundamental supply draw appears to be occurring in line with past years(see chart below).