Natural Gas Seasonality Suggests Price Peak Imminent, But Don't Count On It

by: Hard Assets Investor

By Sumit Roy

It goes without saying that natural gas is a highly seasonal commodity. Used as a heating fuel, gas demand tends to be the highest in the winter. A second demand peak takes place in the summer, when utilities use natural gas to generate electricity to power air conditioners around the country.

On the other hand, during spring and fall - when temperatures are mildest - natural gas demand hits its lowest points. Given these swings in demand, one may wonder whether natural gas prices show similar variability.

As can be seen from the chart below, natural gas prices do indeed seem to follow the seasonality described above.

Natural Gas Seasonality

NatGas Seasonality

Based on the five-year average (purple line), prices tend to reach their peak right at the start of the year, during the early part of winter. They then tend to decline steadily, reaching a trough in April.

Prices then rally, reaching the second-highest point of the year in mid-June - the very early part of summer - before falling to reach their lowest point of the year at the end of August or beginning of September.

At least based on the average of prices over the past five years, natural gas prices are seasonal. Of course, there are years when prices don't follow the trend. In 2011, for example (green line), gas actually hit its lowest price of the year during winter. An extremely warm winter led to a massive inventory surplus, preventing any seasonal bounce in prices.

The big question is, What will happen this year?

As we wrote above, prices typically reach the summer peak around this time of the year before trending lower through the end of August. At around $4.70/mmbtu (red line), prices are about 20 percent higher than they were a year ago (orange line).

However, they are essentially equal to where they were in 2010 (blue line) and 2011 (green line). With current inventory levels much lower than they were back in those years, it raises the possibility that perhaps price action will be different this time around.

In other words, if prices follow the typical seasonal trend, they will likely peak sometime soon before slowly declining over the next several months. But if things are different this time due to low inventory levels, prices may ignore the seasonal script and stay up at these levels or rally even higher.

In our view, things are different, and traders should not count on a decline in prices any time soon.