As we head into the 2006 hurricane season, I've
been asked for my outlook on potential market impact. I'd like to
present some bearish and bullish arguments for the natual gas, and
which way I'm leaning.
In 2005, five hurricanes classified as Category Three or greater
passed through the Gulf of
Mexico. This caused a major disruption in
natural gas production, much of which still continues today.
Roughly 21 percent of a normal year's natural gas production has
been lost this year as a result of last year's storm
activity.
To make a bearish argument for natural gas going forward, let's look at potential influences. We recently had a milder-than-expected winter, and forecasters are predicting a cooler summer, which will reduce demand from power plants. The price of natural gas has fallen about 60 percent from the December 2005 lows, and we have also seen lower demand due to a sluggish macroeconomic outlook. In addition, the rate at which natural gas is currently being injected into storage shows that there could be more then 3.5 trillion cubic feet of inventory by the time the home heating season begins. This is six percent more than last year's record levels.
Despite those factors, I tend to subscribe more to the bullish camp. First of all, the National Oceanic and Atmospheric Administration [NOAA] has predicted an 80 percent chance of an above-normal 2006 hurricane season. Although this is considerably less then last year's predictions, it is based on May climatological conditions. The report will be issued again in August, with likely better predictions. This potential for an upgrade in storm activity, combined with the anticipated evacuations of offshore rigs with any approaching storm, lends a bullish argument. Many of the 457 underwater pipelines damaged by storms last year are still not operating at capacity. Last year, some natural gas processing facilities also suffered heavy damage and are still not operating at full capacity.
Based on this viewpoint, I believe the way to invest in this market using futures or options is to buy breaks into support levels, and place your stops at secondary support. I am not going to get into specific technical levels as these can quickly change, so please feel free to call me for more information, and to discuss a strategy that fits your unique situation. In anticipation of possible rallies in this market, keep a close eye on the NOAA Web site (www.noaa.gov) to look for tropical depressions that may develop into hurricanes.
Greg Milkovich is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 866-631-6216 or via email at gmilkovich@lind-waldock.com to discuss this topic, or others.
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