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Shares of natural gas companies have performed well lately amid expectations of seasonal strength in the commodity itself. Natural gas often strengthens during the fourth quarter as prices rise due to increasing heating demand during the cold winter months. If the pattern continues, shares in the sector might continue to see strength during the next few weeks and months to come.  

Some commodities experience seasonal trends that cause prices to rise and fall during certain times of the year. Natural gas is one of them. The reason is quite simple. During the winter months, colder temperatures in the major heating markets increases demand for the fuel. Withdrawal from underground storage due to increasing demand results in lower supply. The shifting forces of supply and demand drive the price of natural gas higher.

In fact, natural gas will often see an increase in price during the fourth quarter. In the fourth quarter of 2000, prices surged from approximately $5.50 per million British Thermal Unit [BTU] to $9.78, or 88.6%. In the fourth quarter of 2001, natural gas rose 14.5%; in 2002, 15.7%; in 2003; 28.1%; and in 2006, 12%. During the past seven years, natural gas has suffered losses only twice during the fourth quarter (in 2004 and 2005). Figure 1 shows the tendency for the commodity to increase in price during the final few months of the year.

Currently, the price of natural gas is near $7.90 per BTU and already up 44% from late August. Prices rose to a high of $9.00 in December of last year. If the pattern continues, the trend isn’t good news for the homeowner’s heating bill this winter. However, rising natural gas prices are good news for profits and share prices of companies in the industry.

Figure 1: Natural Gas Weekly Chart

In fact, shares of many of the natural gas companies are already performing well. Williams Companies (WMB), for example, rose 9.9% in September and is up fractionally again in October. EOG Resources (EOG), El Paso (EP), and Dynergy (DYN) have also been following the price of natural gas higher since late August. The AMEX Natural Gas Index ($XNG), which tracks the price action of a basket of stocks in the sector, rose 9% in September and is heading higher again in early October. Moreover, if the price of natural gas does indeed rise for seasonal reasons, these stocks can continue to perform well during the remainder of the fourth quarter.

Looking forward, several short-term developments will be worth watching with respect to natural gas. First, $8.00 is considered a technical resistance area for the commodity. However, two low pressure weather systems—one in the southeastern Gulf and another near the tip of Florida—could potentially combine and potentially offer the commodity price support by affecting production in the region. Second, weekly inventory data could also influence short-term natural gas prices. The report offers the latest look at supplies courtesy the Energy Information Association [EIA] and is due for release Thursday morning at 10:30 a.m. Eastern time.


Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site
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