Does Record July Heat Mean Record Low Natural Gas Prices this Winter?
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Global warming giveth and global warming taketh when it comes to natural gas.
As a result of the record heat for July, United States Natural Gas (NYSEMKT: UNG), the exchange traded fund for natural gas, is up by 9.06% for the last month of market action, as more electricity is being used for air conditioning. However, the UNG is down 1.60% for the last week of trading as analysts are now projecting a drop off in demand when the weather cools. Observed Nicole Friedman with Dow Jones Newswires about this: “High temperatures across the country have increased demand for natural gas by utilities. Still, some market participants are concerned the oversupply may swell again if the heat eases up and the air-conditioning demand tapers off.”
But it does not appear as if the weather will not be cooling enough this winter to make up for the low prices of natural gas. Farmer's Almanac projects above average temperatures in the major population centers of the mid-Atlantic from the Washington, DC area through Philadelphia and New York up to Boston. The rest of the country will be mild or average, except for the sparsely populated Upper Plains region of The Dakotas. A warmer winter, like the one for last year, means lower natural gas prices, as there is less demand for heating needs.
Due to this greater demand this summer, the spot price for natural gas has risen from $1.90 in late April to $3.10 in late July. Over the same period, the UNG rose by 32.13%. Companies in the industry, such as Chesapeake Energy (NYSE: CHK) and Encana Corporation (NYSE: ECA), have also rallied. The last month of market action has witnessed a 10.18% rise for Encana. Chesapeake Energy is up 7.33% for the last week of market action.
As a result of the lower price, more utilities have switched to natural gas. But if natural gas spot prices are consistently over $3, power companies will switch back to coal, according to market analysts. At this price level, coal, primarily from the Powder River Basin, becomes more economical. At present, coal generates electricity at a historic low level due to cheaper natural gas. Of the coal used for powering electric utility plants, about 40% is dug out of the Powder River Basin in Wyoming and Montana. For the last 52 weeks of market action, Market Vectors Coal, (NYSEMKT: KOL), the main exchange traded fund for coal, is down by 52.37%. Should natural gas trade above $4, it is projected that much of the coal to gas switching will end.
There have been other transitions to natural gas as a result of its price favorableness with oil (NYSEMKT: USO). More trucks are starting to run on natural gas. Pilot Flying J is installing natural-gas pumps at 150 of its fueling stations. The port of Long Beach already has a fleet of 1,000 natural gas trucks. United Parcel Service is adding 48 more natural gas trucks to its forces. “It’s the only long-term viable option to diesel,’’ said Michael G. Britt Sr., director of maintenance and engineering at United Parcel Service.
On the supply side of the equation, daily natural gas inventory is averaging 69.5 Bcf for July of 2012. Both Chesapeake Energy and Ecana have already reduced the number of rigs in operation. If the natural gas storage glut turns into a deficit by the end of the summer due to the increased usage from the record heat, more rigs will be brought back into action. Should there be a warm winter, the increased number of rigs in operation will result in a glut, depressing the price of natural gas (again). At present, according to analysts, the market is priced for natural gas prices to return to the $4 range in the winter.
The short floats for the exchange traded funds offer an overall outlook for each industry. A short float of 5% is considered to be troubling. United States Natural Gas has a short float of 62.57%, a decline of 11.5%. United States Oil has a short float of 42.35%, an increase of 2.4%. The short float for Market Vectors Coal has fallen by more than 70%.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.