The historic volatility in natural gas continues. Last Friday, I told WeatherWealth clients about a major change in the weather pattern with a potential colder than normal late November and December. Natural gas prices proceeded to rally $1.00 from last Thursday’s lows and bearish EIA number to this Monday’s highs ($7.22) based on other firms changing their weather forecast.
This video describes both La Nina and what we call a “negative Eastern Pacific Oscillation Index. The combination of these two climatic variables working together can produce a cold, early winter. Why then did natural gas prices pretty much give everything back in one day? Incredible.
Four Reasons for Natural Gas Moves
Here are the reasons I felt that natural gas (UNG) prices ran up too much, too quickly in the face of changing weather forecasts. After all, we had a near-record warm fall (globally) that has hurt natural gas demand. In addition, the main LNG export terminal in Freeport, Texas has been down for months.
1)Natural gas prices above $5-$6 this time of the year is very unusual as U.S. production continues to grow.
2) While the LNG export terminal will reopen soon, the weather forecast is warm for Europe. Hence, we need to see sustained cold weather, not just here in the U.S. but in Europe to help demand.
3) The weather last week was very warm across the United States and near-record temperatures this week. While potential colder late November and December weather could well occur, the natural gas market was anticipating another bearish EIA report this Thursday.
4) The European forecast models suggest that after just a week or so of U.S. cold, it will warm up again.
The European Model warms things up after Dec. 6 (red=warmer than normal). Source: Stormvista.com
So what to do in the natural gas market currently?
Based on extraordinary natural gas and weather volatility, using certain option positions is the way to go in this market. This is something we advised quite successfully in several commodity markets over the last few months.
Feel free to take a complimentary trial of our twice-weekly weather-commodity newsletter (Weather Wealth) and see this and many other reports. You can also learn how you can mimic our trade ideas in a new program called AutoTrade. All the information is here:
Regarding trading right now: patience, patience, patience in the midst of global economic uncertainty, bearish chart patterns in some commodities, a stronger dollar, Russia’s war on Ukraine, and mixed weather signals.
The next big questions I will be answering for traders are:
1) Will the Plains states drought continue into next spring and impact winter wheat?
2) How serious will the flooding be that may lower the Australian wheat crop?
3) When will demand worries and a stronger dollar (which has been bearish for corn) be offset by the potential for bullish corn weather in Argentina?
4) How will a change in the jetstream pattern north of Alaska bring colder late autumn weather and put the brakes on the drop in natural gas prices?
Anyway, there are two commodity trades that have been our home runs recently. They were natural gas and coffee. (Some of this is old news now. We already caught the huge move down in prices).
So… what is the best way for you to profit, whether in stocks or commodities?
Listen to what Ted Williams once said (and my comments, below.)
1) Swing within your happy zone:
Basically, this means sticking with markets and products you know best.
In my case, and recent trading advice in my newsletters (see the info and our track record here https://www.bestweatherinc.com/weather-profits/ ):sticking to the highest confidence trades that I know are primarily weather, this time of the year, and were subject to significant profit-taking due to too many speculative (non-commercial) long positions in the open interest of the market. Most recently, these have been short natural gas and coffee over the past few weeks. These were definitely home runs.
2) I’m no genius, I’m smart in spots and I stay around those spots:
I want to lend you my insight from 38 years of experience watching markets and how they react to the weather at “certain times of the year.”
For example, my highest confidence trades in corn and soybeans are almost always during the late spring and summer and during the north American crop season. I also like to recommend grain markets during December-February when I know traders watch South American weather very closely.
Weather is a huge factor in the natural gas market as we go into the late autumn and winter.
For markets such as coffee, the weather is a critical time (now) during the early stages of the Brazil crop cycle: usually between October and December.
That is why, a month or so ago, I went against the bullish crowd in coffee. Take a look at the great early coffee bloom in Brazil due to the rain I forecasted for the Brazil spring, three months ago.
3) Be wary of over-hyped markets:
Some of the most successful investors like Warren Buffett and Ray Dalio are looking for opportunities that others are not.
In other words, catching certain industries early before the crowd and selling into panic and greed. Here too in the case of the soaring natural gas and coffee markets on past fundamentals, it was important for me to look into the future and anticipate a “change in the fundamentals” ahead of time. This is what I do best.
Some markets have already forced out all the longs and are heavily short… natural gas is a good example of this.
Having patience right now in the midst of global economic uncertainty and various global weather fundamentals for grains, natural gas, and soft commodities is no easy task. There are some potential changes to the bearish weather in natural gas with colder late November weather, while the Argentina drought may grow for the corn market. Floods in Australia and the Plains drought are all potential bullish aspects for the wheat market, but it is important to develop longer-term trade ideas based on the third straight winter of La Niña. Feel free to download a complimentary issue of our monthly newsletter Climatelligence here https://www.bestweatherinc.com/climatelligence-newsletter/ and to read about some of our feelings.
If you like it and want to subscribe for a year, my December issue will discuss much more about the energy and grain market.
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Grain prices have taken off, fueled initially by the first bull market in wheat in years. A severe drought in spring wheat areas in North Dakota was the first sign of trouble. Problems in Canada, Australia, and Europe followed. Now, soybean traders are worried about dry conditions developing in the Midwest. Just over 10% of soybeans are grown in the Dakotas. The drought is spreading into Iowa, with hot dry conditions expected over the next few weeks. Moving forward, less moisture on the ground will increase daytime surface heating, allowing for warmer maximum temperatures.
Image Credit: USDA & TropicalTidbits.com
Natural Gas prices have lagged behind the grains, despite some hot weather in the southwest and midwest. The pattern just does not want to push the hottest temperatures in the the Ohio valley and the East Coast. New York, Illinois, and Pennsylvania consume large amounts of natural gas for cooling demand. Therefore, it will take a decent heat wave for natural gas to compete with the grain market.
On your mark, get set, Grain!
The USDA acreage report acted as a ‘starting gun’ last Friday. Analysts forecasted more soybeans planted due to the rain delays in corn. However, the report showed the opposite occured, with corn acreage increasing instead of soybeans compared to expectations. That news, combined with the weather threats allowed soybeans to regain a month’s worth of declining prices in just a matter of minutes.
We mentioned this grain scenario to our free newsletter subscribers back in May. The commodity ETN:JJG is comprised of wheat, corn, soybeans. We knew that if our weather forecast verified, that some fireworks in one or more of these markets could occur. The ETN price has already reached 4 month highs. In the coming weeks, traders will want to know how long this dry, hot weather will stick around in the Midwest. If wheat & soybean conditions continue to drop, so will the end-of-year yield/production estimates. Any shift in the ridge could mean a big change for corn and soybeans. For more on if grain prices will go higher, email email@example.com
Cotton prices dropped nearly 20% from May highs into late June. July futures prices spiked in May on tight supplies predicted in the USDA report. Great global crop conditions and strong speculative selling then spurred the current collapse. Credit: Barchart
Most notably, India has had a great start to the monsoon (unlike the last few years). Farmers are getting adequate rainfall, aiding in the irrigation already in place. India is the second largest producer in the world behind China. Another country that should have great production is the United States. The latest crop condition report (June 25th) showed 41% of the crop rated good & 11% rated excellent (best since 2010 for this time of year).
The oddity of this price drop is that export sales have been very strong. China’s glut of cotton has been dwindling over the past few years. On top of that, China cotton users need higher quality cotton to blend with the old supply.
The next fundamental news to watch will be the USDA acreage report on June 30th. With good conditions, most analysts expect this to be friendly for U.S. production. Traders will also continue to watch India and U.S. weather conditions. We have an Indian monsoon report coming to our clients soon, giving the forecast for the rest of the season. The slight drought in Texas cotton areas may begin to be noticed if it continues. See the dryness developing in northern Texas: