How to Profit from the Second Deep Freeze Headed Our Way
Last week, North America was plunged into a deep freeze when a “polar vortex” (an extreme weather event marked by record-breaking cold temperatures and winter weather systems caused by an Arctic cold front) swept across the continent, sending the coldest air in 20 years into major population centers in both the United States and Canada.
Areas in the Midwest and most of Canada were hit with weather normally reserved for the North Pole. On January 5, 2014, the temperature in Green Bay, Wisconsin was a brisk -18 degrees Fahrenheit (°F). During the polar vortex, the temperatures in Atlanta fell to just 6°F, while those vacationing in Tampa were treated to temperatures as low as 24°F.
In the lead-up to the polar vortex, spot U.S. energy prices soared. Natural gas for next-day delivery for one contract in New York jumped to a record $90.00 per million British thermal units (BTU) on January 6; that represents a 660% increase from the close of the previous week and 20-times more than the natural gas benchmark futures prices. Normal winter natural gas prices can be found in the high teens or low $20.00s. (Source: Meyer, G., “Freeze drives up US gas and power prices,” The Financial Times, January 6, 2014.)
The harsh, cold weather forced many Americans to burn more gas to keep warm. And since roughly half of all U.S. households use natural gas for heating (accounting for 21% of U.S. natural gas consumption), there was concern that natural gas suppliers might not be able to service every customer. (Source: “Frequently Asked Questions,” U.S. Energy Information Administration web site, last accessed January 14, 2014.)
Here in the U.S., natural gas is purchased by gas distribution companies that sell it to residential consumers. Fortunately, most of this gas is purchased in longer-term futures contracts—which tend to be more stable and safe, since no one can really predict something like a polar vortex three months in advance.
For example, the week during the polar vortex, the futures price for natural gas (delivered in February) stood little-changed from the previous week. What can drive up the price, however, is an unexpected demand for the fossil fuel as a result of a polar vortex (or even two) and short supply.
“Polar Vortex II” is expected to hit the U.S. this week. It isn’t expected to be as harsh as last week’s, but it will drive up the demand for natural gas. Weather forecasters say this second polar vortex will hit the lower Mississippi Valley and Midwest earlier in the week, hitting the Eastern United States later in the week. The cold Arctic air will follow a couple days later.
The unexpected surge in demand for this fossil fuel has sent futures soaring. Prices are being affected by speculation that an Energy Information Administration (EIA) report on Thursday, January 16 (tomorrow) will report a record decline in the nation’s natural gas stockpile.
Stockpiles in the U.S. have been down since late November 2013. For the week ended January 3, 2014, natural gas stockpiles totaled 2.817 trillion cubic feet—10% below the five-year average and 15.8% for the same week in 2013. (Source: “Weekly Natural Gas Storage Report, for the week ending January 3, 2014,” U.S. Energy Information Administration web site, January 9, 2014.)
In the lead-up to the Department of Energy storage report tomorrow, investors will, I imagine, be reluctant to short natural gas. Those interested in adding a natural gas position to their investment portfolio might want to consider United States Natural Gas (NYSEArca/UNG). This exchange-traded fund (ETF) is up more than 15% over the last two months and more than six percent since the first day of trading this week.
So while the second polar vortex may freeze out many in the U.S., it doesn’t have to leave your investment portfolio in the cold.