Natural gas prices are often whipsawed in the few minutes after the EIA Weekly Natural Gas Storage Report is released based on whether or not the storage numbers beat or missed the current analyst estimates. But after a few minutes of trading it becomes more important whether or not the storage figures beat the year over year comparison and the all important 5 year average. The storage report provides weekly historical reports going back to 1994 and it also provides the five year average for each reporting period for the upcoming year. Last year the weather turned bearish for natural gas in the last two weeks of February and the first week of March. Then, the weather turned extremely bearish for natural gas in the last 3 weeks in March of 2012.
This past weekend central Florida saw temperatures dip below freezing for the first time this winter. Based on the cold weekend temperatures and the weather forecast for the remainder of the natural gas storage reporting week of February 16-22, it should be easy to handily beat last year's bearish draw of less than 100 Bcf and the 5 year average draw of 118 Bcf. This report comes out on February 28. The storage week of February 23 through March 1 provides another round of easy comparisons with a 5 year average of 107 Bcf and last year's draw again well below 100 Bcf. According to the current outlook of the Global Forecasting System (GFS), the temperatures should be cold enough next week to beat last year's number and the 5 year average. It should be noted that 10 day weather forecasts can have a high level of uncertainty and are subject to change.
The National Centers for Environmental Prediction Climate Forecast System Version 2 (CFSv2) is currently predicting a colder than normal March for most of the country. Again, longer range weather forecasts carry a level of uncertainty and are subject to change. However, we do know that the storage comparisons in March will be against the most bearish March in the data going all the way back to 1994. To illustrate just how warm March of 2012 was we will take a look at the temperatures in Chicago. According to AccuWeather.com the temperatures in Chicago for March 2012 were well above normal. Average daily temperatures are calculated by taking the daily high temperature and the daily low temperature and then adding them together and dividing by 2. Twenty of the twenty two days in Chicago between March 6 and March 28 of 2012 averaged 10 degrees or more above normal. Between March 13 and March 22 all 10 days averaged more than 20 degrees above normal, including 5 days in a row more than 30 degrees above normal for both the daily high and the daily low.
These abnormally high temperature anomalies caused natural gas storage to reach an end of season low on March 9 of 2,369 Bcf. By March 30 of 2012 natural gas in storage had already grown to 2,472 Bcf. The end of March is normally when the end of season storage low is reached. Going back to 1994 there have been 4 years when the end of storage season low was reached after the second week of April, 3 years after the first week of April, 4 years after the last week of March, and 5 years after the next to last week of March. In fact, the end of season storage low was reached by the second week of March only three times. In addition to 2012, the only other two years were in 2009 and 2010. Both of those years are included in the current 5 year average. In 2009, the economy had collapsed and industrial demand for natural gas was averaging 3 Bcfpd less than 2008. Natural gas storage reached 1,651 Bcf on March 13 of 2009, and grew to only 1,654 Bcf by March 27 of 2009. If not for the economy, natural gas storage would have reached a season ending low in the next to last week of March in 2009.
Even though end of season storage normally reaches a low point at the end of March, this year the 5 year average has an injection of 6 Bcf for the week ending March 22 and an injection of 4 Bcf for the week ending March 29. Normal March temperatures will allow natural gas storage to significantly close the current storage surplus of 351 Bcf over the 5 year average. Colder than normal temperatures in March, as currently predicted by the CFSv2, could erase most of the storage surplus with the 5 year average by the end of March. Natural gas prices are depressed well below the cost of drilling an average natural gas well in most natural gas fields. There is a lot of room for natural gas prices to rally to the upside once investors perceive excess storage will no longer be an issue in 2013. The potential for very bullish weekly natural gas storage reports in March could catch many investors by surprise.
The easiest way to take advantage of a near term rally in natural gas prices is to take a position in the United States Natural Gas Fund (NYSEARCA:UNG). Another way to play a rally is to buy shares in natural gas exploration and production companies that remain largely unhedged for natural gas prices such as Chesapeake (NYSE:CHK), Comstock resources (NYSE:CRK), and Ultra Petroleum (NYSE:UPL).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.