Home > Main > Coldest Winter in 25 years to cause massive NG spike

Coldest Winter in 25 years to cause massive NG spike

January 4, 2011

Looks to me like Natural Gas is breaking out.  Yes, yes, there is massive amounts of new supply potentially available.  But the story with natural gas is the delivery process.  The delivery process in Nat Gas is lengthy.  What we have available today is what we will available in March and April.

This is why Natural Gas is notoriously spiky. You can look back across the history of the natural gas contract and see huge spikes, even in winters where temperatures were not that cold.   The delivery process just takes a bit more time than for other commodities, and if the supply isn’t already available, you won’t be able to get large amounts of new supply in 2 weeks or a month and just have it show up.  Nope. The price of NG just spikes in an attempt to throttle back demand.

Now comes the juicy parts of the NG story: We are having the coldest winter in the last 25 years, and we are experiencing an economic recovery… and when I look at the possibility of the North Atlantic shut down for a few months this year, I suspect that this winter could get much colder.

The North Atlantic current may have shut down for a few months. What is the North Atlantic Current?  It is part of a great conveyor belt of water that circles the globe, cooling warm areas and warming cool areas. If the current shuts down – well, that would be bad because the eastern seaboard would be much colder, but good if you are long Natural Gas.  I suspect even if it did not shut down, but just slowed for a few months, the U.S. could see a much colder winter.

In any case, the UK could have its the coldest winter in the last 1000 years.  Looks like the U.S.  could have the coldest winter in 25 years.  It is certainly much colder than it was last year – outdoor ice rinks were frozen 2 full weeks earlier this year.

And then add in a situation where people are feeling a bit flush with cash compared to last year.  People aren’t in danger of losing their jobs right now.  While new hiring is still frozen, people and corporations must be earning more – they are paying more in corporate and personal taxes.   (No link for the personal taxes, but they are out there if you know where to look – try Daily Jobs Update).

Turn up the heat a bit, Baby its cold outside.  Much of the recent weakness in natural gas must have been due to the possibility of increased production, rather than actual increased production.  There just hasn’t been enough time for these new finds to come on line.  So they are drawing down the existing fields more rapidly than they would have before the finds, but the supply constraints that caused Natural Gas to go up to over $10 a therm must still be there.

The conditions for a spike in Natural Gas are in place.  Get some egg nog and turn the heat up!

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