HardAssetsInvestor

Written by Julian Murdoch  |

October 04, 2010

How To Profit From The Flat Natural Gas Curve

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With supersized supplies and increasing rig counts, is the key to the natural gas market still "seasonality"? And how can investors profit from the flattened futures curve?

 

 

Don't let current natural gas prices spook you. In this market, the most important word to remember is "seasonality."

This time of year, we expect to see the price of natural gas hit seasonal lows, as demand falls along with temperatures. With less natural gas needed to augment the electricity production spikes we tend to see during the heat of summer, more natural gas moves into storage, ready to meet cold-weather heating needs when winter comes. Along with that cold weather comes higher demand and, naturally, higher natural gas prices. But until then, we have to wait.

So far, the traditional relationship seems to be holding true. Natural gas for November has been trading between $3.75 and $4.15 in recent weeks, with spot natural gas closing at $3.67 MMBtu on Friday, and November futures just slightly higher.

 

But will we see prices of natural gas rise before the cold weather sets in? Yes, but the rise might be negligible.

Just look at last year. At this time in 2009, the market had expected prices to rise sharply heading into winter. The curve for this year (in white) is much flatter.

 

 

Of course, the first thing you'll notice is how wrong last year's futures were about where the price of natural gas would be right now. A year ago, the market "expected" the price of natural gas would be over $6—a far cry from last Friday's $3.67. But that's okay: Futures are supposed to be about locking in future prices, and while we can make predictions, we'll never know tomorrow's price for sure until it comes.

Right now, we're seeing next year's natural gas priced at less than a dollar over this year's, the flattest we've seen the future's curve in ages. So what's going on?