Stormy season sparks natural gas bull move

IT HAS been a difficult six weeks or so for the energy markets. Whether it was the oil spill in the Gulf of Mexico, continued concerns about growth in emerging markets or no end in sight to the Eurozone sovereign debt crisis, investors were shunning riskier assets such as oil in favour of safe havens such as gold and US Treasuries.

But while oil futures have fallen as much as $15 since the start of May, natural gas has been on an unshakeable upward trend. It rallied more than 10 per cent last week to hit a 14-week high after an official inventory report showed stocks growing by less than expected.

This triggered a break above the 200-day moving average at $4.54 per million British thermal units (mmBTU) in the near-month futures contract. Natural gas futures have since risen even further to stand at $4.848 yesterday.

Natural gas is now more than two standard deviations away from its 50-day moving average, according to analysis from Bespoke Investment Group.

So can contracts for difference (CFDs) traders expect natural gas futures markets to continue to make gains or has the commodity reached the end of its bull run?

Ole Hansen, senior manager of CFD and listed products at Saxo Bank, thinks that natural gas prices should stay well supported over the summer and is initially targeting a near-month futures price of $5.05 per mmBTU.

His reasoning is three-fold. First, hot weather in the north-east and the middle of the US has boosted demand for gas-powered electricity to run air conditioners. Second, gas producers seeking to drill in the Gulf of Mexico must resubmit plans to comply with new safety and environment requirements, limiting production. Finally, 1 June marked the start of the 2010 Atlantic hurricane season and experts are expecting an “active to extremely active” season, which could disrupt production and limit supply.

Others are not so certain. While analysts at Barclays Capital accept that weather-related concerns have pushed North American natural gas markets higher in recent weeks, they point to statistics from the Energy Information Administration (EIA), which show three consecutive months of production growth and they expect this trend to continue.

Commodity strategists led by Francisco Blanch at Bank of America-Merrill Lynch agree, arguing that “growth in shale output and sluggish demand recovery will keep the supply-demand balance weak”. However, they still forecast an upward trend: $4.80 for the third quarter of this year, $5.60 for the last three months, and $6 for 2011 as a whole.

Natural gas can be traded with all the major providers if you want to take advantage of the volatility expected over the summer from the hot weather and the hurricane season. IG Markets offers trading in natural gas almost 24 hours a day with a spread of 30 basis points.

With a stormy summer on the cards, supply disruptions are likely and this should squeeze prices even higher.