One of the most important investing lessons I have learned over time is to be careful when the price of an asset goes up significantly in a very short period of time—it usually doesn’t end well. Prices increasing very quickly tell me that speculators are entering and they are buying at whatever price the stock may be at the time; it shows irrationality. It’s all about short-term profit—making the quickest bucks in the shortest period of time and leaving.
When I look at natural gas prices, this is exactly what has happened. Please take a look at the chart below of daily prices and how it has been a rollercoaster ride for investors in this commodity recently.
Chart courtesy of www.StockCharts.com
In late November, natural gas was trading below $3.75. By the end of December, the prices jumped about 19% and surpassed $4.50. Then they declined for a bit in January. From mid-January to the end of February, they soared significantly higher; we are talking about a gain of 50% in just about 28 trading days.
From there, prices have been declining.
As I have stated in these pages before, I am bullish on natural gas in the long run. My reasoning for this: when prices are low, producers don’t have much incentive to produce more. This creates significant supply problems over time. With a growing reliance on natural gas, the supply problem could get even bigger.
One of the reasons that prices soared between January and February was a short-term supply concern. In cold weather, natural gas is used to heat up homes and factories. With the U.S. and … Read More
Just like any other commodity, natural gas prices are affected by supply and demand metrics. If demand increases and supply remains the same (or declines), you have a perfect recipe for higher prices. Since the beginning of the year, this commodity’s prices are up more than 40%!
Before you start judging where the prices will go next, you have to see what kind of factors can affect the demand or supply. Consider gold prices, for example. If the demand for gold increases and, at the same time, there’s a discovery of a major mine—the prices may not move as much as anticipated if the mine wasn’t discovered. The reason behind this is simple: there’s supply to meet the demand.
A few factors that affect the natural gas demand and supply are playing out in favor of those who are bullish on it. For example, the commodity is highly affected by weather.
In extremely cold weather, natural gas is used to heat up homes—cold weather disrupts the short-term supply due to increased demand and causes prices to soar. In extremely hot weather, we see a similar situation occur in the commodity’s prices. Power plants use more natural gas to make electricity to meet the increased use of air conditioning units in homes and buildings. This phenomenon, again, causes a disruption in the short-term supply because power plants consume more. This results in higher prices as well.
What’s happening in natural gas prices these days is the very same problem; the short-term supply is being tormented by extreme weather—in this case, extremely cold weather. We have seen some extreme winter storms and … Read More