Natural Gas -- Following Weather Closely
After our bullish late winter attitude in natural gas on one of the coldest March's and Aprils on record in the United States, the natural gas market has refocused its attention on a summer that is destined to be quite a bit cooler than the last 2 years. We began expressing more of a bearish attitude 2-3 weeks ago, and natural gas prices and the ETF (NYSEARCA:UNG) has fallen some 15% or so. The impetus has not only been the low coal prices, but a late May and June that has featured below normal cooling demand. While the western U.S. and at times Texas has seen some extreme heat, without a major supply disruption, prices could trend to the $3.00-$3.50 area this summer. Some short term heat next week may keep the market falling very far for now, but given my summer temperature outlook from a month ago, I see little hope of a major rally in natural gas prices
Hurricane Season and What May Drive Summer Temperatures
I describe above what may be tropical storm Barry in 12 days or so, but its impact will be to weak natural gas demand, not cause major supply disruptions. To the right, the cool ocean waters may mean the hurricane season later this summer and fall, will not be quite up to snuff as other meteorologists suggest.
Extreme heat did blanket the west last week and there are concerns about low water supplies in the Pacific Northwest as Hydro Plants may have to switch to natural gas. However, we are slowing reducing the deficit of natural gas stocks, that we established this winter when it became cold.
Changes in the stratospheric temperatures this summer, versus the last 2 summers, should still mean a normal to cool summer across most of the Midwest and/or East
Other Markets and Weather
We took out the risk of frost in the forecast for Brazil coffee areas this summer (their winter), about 3 weeks ago and prices for (NYSEARCA:JO) have collapsed. With Brazil still harvesting a record off-cycle crop, good weather in Vietnam pressuring Robusta prices and a recovery in Colombia's crop, I feel coffee prices have another 5-10% down in coming weeks.
The USDA confirmed on Wednesday, just how resilient the Plains wheat crop is from frost and drought. Important rains in key central areas of Kansas the last 6 weeks and a decent Soft-red crop, big rains easing dryness in Australia and the Ukraine of Russia have all been bearish factors in the wheat market.
For corn and soybeans, I still see some wet weather issues for soybeans especially in coming days, which will likely keep risk premium in the soybean market until summer. However, my outlook for normal to cool July weather for the U.S. corn crop will likely mean corn prices below $5.00 next month, unless we have either a 1993 or 1995 wet, cool weather scenario in the Corn Belt. These were the only 2 years I could find, in which corn prices rallied in summer, from wet weather. There is little chance of hot, dry weather returning, so look for the ETF (NYSEARCA:CORN) to trend lower through summer.
With a huge Brazilian sugar crop and a good Indian Monsoon coming, I also see little major upside for sugar prices and the ETF (NYSEARCA:CANE) this summer.
Finally, cotton prices rallied big time on Wednesday due to the USDA showing the effects of the Texas drought on projected ending stocks and acreage plus an increase in demand from China. Traders will be watching the weather very closely in coming weeks for India, China and Texas. Overall there is mixed global weather news, as India's monsoon will get off to a great start. However, there is some potential short term friendly weather outlooks for cotton because of the Texas drought.
The MJO, a pulse of low pressure in the tropics will move into phase 8 in coming days and should mean more wet weather, but normal to cool temperatures for the U.S. breadbasket
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.