Trade of the Week: Winter sets gas investors all aglow

The price of US natural gas spiked sharply this week, after American energy agencies forecast household spending on heating will rise 15% this year to combat a colder winter. The predictions set off a swarm of speculators anxious for a profit and sent hedgers scrambling to cover their exposure.

On Tuesday, the price of natural gas contracts traded on CME Group’s Nymex jumped 4.78% in a matter of hours. Prices for the benchmark Henry Hub natural gas futures for delivery next month rose to an intraday high of $3.51 per million British thermal units in early afternoon trading, from a midday low of $3.35.

A trader buying 1,000 contracts at $3.35 and selling at $3.51, before the rally cooled slightly, could have made a notional gain of $1.6m. A contract is equivalent of 10,000 million British thermal units.

According to the October forecasts from the Energy Information Administration, the National Oceanic and Atmospheric Administration is predicting the winter in the Northeast, Midwest, and South will be between 20%-27% colder than last winter.

It forecast an average price of $3.35 for natural gas next year, but analysts at a Deutsche Bank maintain a more bullish price forecast of $3.75, suggesting supply levels could fall still further as producers continued to “rationalise” their inventories.

Other analysts say $3.75 is likely to be a top-end resistance level for the market. As the EIA points out, a fall in temperatures this winter compared with last year will actually mark a return towards “normal” winter temperatures in the US. Last winter was unseasonably mild. This winter will be a lot colder, but it will still be around 2% warmer than the average winter for the last 30 years.

Traders say the market tends to react sharply to short-term production and consumption forecasts. CME’s gas futures spent most of yesterday in a tight range between $3.46 and $3.50. At the Chicago open yesterday morning, it was just below $3.52.