The Cycle Of NatGas


Commodities have enjoyed a massive run up since late 2008 as the U.S. dollar continues to devalue on a weekly basis thanks to the Federal Reserve and the country’s current monetary policy.

But one commodity has defied the run up and has been on fast track to zero since July of 2011 when it traded around $4.50 per contract. Since then, as inventory reports come out time and time again, the commodity has entered a downward spiral and last traded below $2.15 a contract.

There are quite a few reasons why there’s a big problem with natural gas. First and foremost would be the weather. The past six months have been unseasonably mild across the entire United States with New York hardly recording any snowfall this year. Less heat has led to less usage which in turn has led to an increase in the amount of inventory of natgas that’s available.

And that inventory is a huge issue. It essentially has nowhere to go except into storage facilities. As facilities near capacity, companies refining and fracking natural gas will be forced to dial down if not stop their operations. It makes for a deadly situation in terms of price where there are fewer and fewer buyers and an overabundance of a particular commodity.

Some traders believe that the main trade is shorting the front month natural gas contracts and going later dated contracts – selling now, buying later. Others think that the worst has yet to arrive. Kevin Kaiser, energy analyst at Hedgeye Risk Management, believes that storage will peak as we head into autumn.

“By my supply/demand model… I can’t see how we don’t hit storage capacity by late September,” Kaiser told Markets Media via Twitter.

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