Natural Gas prices have pretty much reached our objective advertised 3-5 weeks ago, following several recently friendly EIA numbers and some of the coldest late February and March weather in years. The ETF (UNG) has now rallied about 25% the last 3 weeks and I feel comfortable recommending taking some profits here. However, the weather pattern at the very least the next 2 weeks, will probably keep natural gas prices from falling very far. How much of the present cold and the forecast is already built into prices is hard to say. However, coal switching this late in the season, is not nearly as prevalent as it often is during the heart of winter.
Incredible stratospheric warming, which began in late January, took about 3-5 weeks to work its way down to the surface over the Arctic and Greenland. In addition, the MJO pulse recently moved into a more favorable cold position allowing all the climatological ingredients to finally line up for a sustained period of cold weather.
Europe Having one of the Coldest March Weather Patterns in Recent Memory
Not only with the U.S. experience temps some 8-15 degrees below normal over parts of the Midwest, deep South and Northeast for the rest of March, but Europe is seeing its coldest March in some 17 years.
While it is rare for heating oil and the ETF (UHN) to see a late winter rally on weather, it is possible this could happen in the coming days. The crude oil complex has been hit a bit due to renewed concerns with the European crisis (most recently in Cyprus), as well as excess U.S. supplies and a stronger dollar. Natural gas is much more pure of a weather play than heating oil. In the U.K, natural gas prices reached 4 year highs last week.
Map Above --
We second guessed computer models several weeks ago, since we saw this unprecedented March blocking pattern over Greenland and the North Pole. The result? Temperatures in Europe later this weekend and part of next week may average 15-25 degrees below normal (white area). This would have more of an impact on the gasoil/heating oil market, if winter was just beginning. Nevertheless, it may impact some retail, transportation and energy industries for the rest of March.
Which other Commodities are being Affected by Weather?
The grain market has been paying very close attention to the U.S. drought that still covers many Midwest and Plain States, as well as new crop production reports coming out of South America. Our longer term attitude is not necessary a bullish one, due to our expectation of huge South American soybean crops and the chances for the Midwest drought easing with time. Nevertheless, the wheat crop from Nebraska to Kansas and Texas is only in fair shape at best and traders will be monitoring forecasts very closely in April and May for any dry weather.
Grain traders will be watching very closely the March 30th planting intentions reports for corn, soybeans and cotton. They will also watch whether this present cool weather pattern extends through April and how it might affect plantings. Cotton prices have soared due to unusual Chinese demand and ideas world acreage will drop 10-15% or more this spring, at the expense of grain plantings. I am not sure how much more upside we have at this point in cotton.
FCOJ (orange juice prices) have rallied close to yearly highs, due to a combination of drought in Florida and "Greening Disease" issues brought in by a virus from Asia. Rains will be critical for Florida come May-July otherwise prices could explode. About 2 months ago we recommended buying OJ futures with a 117.00 stop. A trader should raise stops to the break even level of about 122.00 in May or July futures and stay long, or take profits on 1/2 of their position, as some rains may return to Florida, with time.
While coffee prices continue to slowly head south, we will be watching Vietnam's weather for clients and the Robusta market very soon. It has been unusually dry here since last Fall, so rains will be critical come April-July, otherwise the Vietnam coffee crop could be reduced. At some point disease issues in Central America and dry weather in Vietnam may take the bleeding out of the coffee market.
Weather for west Africa cocoa will be ideal for March with a replenishment of moisture, though there may be some crop issues developing in Indonesia. This market has gotten to the point that demand and the slight deficit might kick in to jump start this market. Nevertheless, without major 2013 crop issues in west Africa, I do not see this market rallying very far on weather issues.
Finally, an article in Barron's this week talks about the world sugar market. Sugar has also been under pressure from a rebound in Brazilian production. Wet weather returning to Brazil's sugar cane region may be one excuse to keep this market from falling much more, as some harvesting issues may arise later this month.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.