Natural gas is often viewed as a market of winter opportunities, but things can heat up in summertime as well.

No question about it, winter weather can produce substantial price swings in the natural gas market. In turn, the price swings can produce significant speculative opportunities in natural gas futures, as well as strong reasons for suppliers and users to hedge their risks.

But opportunity and risk in natural gas certainly are not confined to one season. Indeed there are factors--especially the two "H's" of heat and hurricanes--that can create summertime fireworks as well.

This year is no exception, and both the speculative opportunities and price risks of summer can be managed utilizing the Kansas City Board of Trade's Western Natural Gas futures and options contracts. "The market swings of summer can be like hills compared to the mountains of winter," said David Wilson, a partner at Coopers & Lybrand. But nonetheless, he says, summer should not be overlooked. "How hot is it going to be? What about hurricane season? These are things that can move the summer markets."

George Ellis, director, GSC Energy, said in early June that natural gas storage levels had been at a significant deficit to previous years, particularly in the western areas served by the Kansas City Board of Trade's futures contract. But recently, he said, those levels have improved significantly and come closer to the levels of past summer seasons.

That factor, combined with a cooler-than-normal spring in some areas, was contributing to a weakening price picture heading into the start of summer.

"If we don't get heat or a hurricane, prices could stay somewhat weak," Ellis said.

But the key, of course, is the "if." While weather forecasting has improved a great deal in recent years, it still is far from perfect and forecasts become less and less reliable the further into the future they look. Demand-generating heat waves and supply- threatening hurricanes in the Gulf of Mexico often cannot be predicted until they are nearly a reality, giving the gas industry little time to prepare and react.

Wilson said the supply/demand situation in the gas market in early June was in a rough balance, with conditions reflecting expectations for normal summer weather. But deviations from normal weather patterns could create brief price spikes.

Continued Cool Or High Heat?

Matt Rogers, energy weather consultant with Earth Satellite Corporation, expected seasonally cool conditions to persist in the eastern U.S. through June and early July, with the best chances of above-normal temperatures there coming from mid-July through August.

Meanwhile, Rogers forecasted warmer-than-normal conditions in much of the west, particularly the desert southwest, throughout the summer. The Pacific Northwest, however, may be closer to normal. Fred Gesser, chief forecaster for Weather Express Inc., predicted above- to much-above normal temperatures in many areas west of the Rockies during June and July, with the warmer conditions also occurring in the extreme southeast in June and along the eastern seaboard in July.

Jeff Penner, consulting meteorologist with The Weater Center Co., predicted below-normal summer temperatures in the northeast. While Penner forecast near-normal conditions in some western areas, he noted that the season in the west could be one of some extremes, with heat waves and cold spells offsetting one another.

Hurricane season expectations from several forecasters were for slightly above-normal activity.

Many Ways To Trade

Heat waves, unseasonably cool weather or hurricanes in the Gulf of Mexico all can produce summer price swings. These gyrations can create profit opportunities for speculators through use of Kansas City Board of Trade Western Natural Gas futures. Investors expecting prices to fall can sell a KCBT contract, while those expecting prices to rise can buy.

For example, an investor on June 26 of last year expecting that forecasts for continued hot weather would drive natural prices higher might have bought one KCBT August futures contract at the closing price of $2.255 per MMBtu (million British thermal units). Heat did indeed drive the prices higher, and two days later on June 28 the August contract settled at $2.355. If the investor had sold at that price to close out the transaction, the trade would have shown a net gain of $1,000 ($2.355-$2.255 = $0.10 x contract unit of 10,000 MMBtu = $1,000).

Trading strategies also can involve intermarket spreads. KCBT Western Natural Gas futures have a delivery point in west Texas and strong correlations to western markets. Henry Hub natural gas futures traded on the New York Mercantile Exchange, meanwhile, correlate well with many eastern markets. Consequently, an investor expecting a change in the relationship between western and eastern U.S. prices could execute a KCBT/NYMEX natural gas spread trade. Differing weather patterns, as well as differing supply situations, can spark movement in the price relationship between the two regions.

Jerry Brown, vice president with KN Marketing, noted in early June that long-term forecasts were for continued heat in the southwestern U.S. If those forecasts hold they could lend support to prices for the KCBT's western-oriented contract in comparison to the NYMEX's eastern contract, Brown said, as the eastern U.S. had been cool.

Intramarket spread trades are another option. An investor expecting changes in the price relationship between summer and winter gas prices, for example, might trade an August/January spread. The Kansas City Board of Trade also offers options on Western Natural Gas futures, giving investors yet another vehicle for trade.

Natural gas suppliers and end users can use KCBT futures and options to help protect their business against the volatility in natural gas prices, establishing a price for their production or consumption in advance of actually selling or purchasing the physical commodity.

As with any investment, investors should investigate the risk and appropriateness of trading futures and options before entering into a transaction.

June 1997
Kansas City Board of Trade
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