Winter Is Not Yet Over For Natural Gas

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Includes: BOIL, CHK, DGAZ, UGAZ, UNG
by: HiddenValueInvestor

Summary

A sudden stratospheric warming event occurred in the Arctic over the weekend, weakening the polar vortex. The forecast calls for additional warming.

The 10-day forecast brings a significant shot of cold weather all the way down to the Gulf of Mexico.

A colder than expected February and March could eat away at the current natural gas storage glut. This could lead to a rebound in natural gas prices.

A few days ago the forecasts were leaning towards a warmer than normal February and winter ending with a whimper. All of that changed over the weekend when a sudden stratospheric warming occurred in the stratosphere above the Arctic. A sudden stratospheric warming is when the temperatures in the upper atmosphere suddenly surge by 30 to 50 degrees celsius. These temperature surges occur on average once every two years. They weaken the polar vortex.

The polar vortex above the North Pole is basically a cold-core low pressure system with strong winds that rotate counter clockwise in the middle and upper troposphere and up into the stratosphere. The winds form a fence around the coldest air on the planet in the Arctic keeping the air trapped in the far north. But when a sudden stratospheric warming occurs the winds weaken and allow some cold air to escape and plunge southward. A major stratospheric warming can even slow the winds to a crawl. In some cases the winds reverse to a clockwise rotation allowing most of the cold air in the Arctic to escape southward.

Here is a look at a graph measuring the temperatures over the Arctic at 70-hpa, which is about 11 miles above the earth. The green line is the mean average temperature for any given date since 1979, and the red line is temperatures for 2015 through February 1, 2016.

Click to enlarge

Notice the sudden upward movement in the red line over the last few days. This is the sudden stratospheric warming event. While it is too early to say how powerful this event will end up, the forecast is for additional warming events over the next 10 days.

It normally takes 10 days to two weeks for air escaping from the polar vortex to reach the United States. The weather models are picking up on the coming plunge of cold air. Below is a look at the temperature forecast at 850 mb (5,000 feet above the surface) for February 11, 2016, by the EMCWF model:

Click to enlarge

The blue represents the cold front pushing down into parts of Florida. The purple represents some very cold air over the Midwest. The significance of the polar vortex weakening is that additional shots of cold air can be expected over the next several weeks. How cold and how far south the fronts move will be dependent on just how weak the vortex gets.

The change in the weather outlook is significant for investors in natural gas futures and natural gas production companies like Chesapeake (NYSE:CHK). The latest weekly EIA Natural Gas Storage report shows natural gas storage is currently 432 Bcf above the widely followed five-year average. The only way to eat into that storage glut in a short amount of time is with colder than normal winter weather over the next few weeks. Otherwise it will take months to bring natural gas storage back towards the five-year average keeping natural gas prices depressed.

The article The Coming Natural Gas Supply Crisis details how the rig count has collapsed and not enough wells are being drilled to maintain the current supply of natural gas. Natural gas futures prices for the 12 month strip currently average less than $2.50 per mcf. Chesapeake, for example, loses money on any rig program it chooses to run in its three best and most significant natural gas fields; the Marcellus, the Haynesville, and the Utica. They don't have money to burn, and neither do most drillers in the industry. At some point prices for natural gas will have to rise towards $4 per mcf, or else supply will keep sinking.

Investors need to keep an eye on the ten day weather forecasts to track and see if any additional cold shots hit the Gulf of Mexico. It will probably take three or four more strong cold fronts to head south to eat through enough of the natural gas storage glut to move prices higher in the near term. But with the onset of the sudden stratospheric warming additional cold fronts are a strong possibility. Should the forecasted cold fronts materialize expect a sustained rally in natural gas prices.

ETFs To Which Natural Gas Fundamentals Are Relevant:

  • The United States Natural Gas ETF, LP (NYSEARCA:UNG)
  • VelocityShares 3x Inverse Natural Gas ETN (NYSEARCA:DGAZ)
  • VelocityShares 3x Long Natural Gas ETN (NYSEARCA:UGAZ)
  • ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL)

Disclosure: I/we 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.