It’s been a banner week for natural gas. Hitting $6.40 per million BTUs on Thursday, the commodity has risen more than 30 percent in eight trading sessions, up to a five-year high. But expert energy trader Rob Raymond says we may not have seen the top just yet.
“With sustained cold, you could see $7 or $8,” said Raymond, the founder and principal of RCH Energy, on Thursday’s episode of “Futures Now.” “This is about rationing demand. Because basically, you’re running out of molecules, and at some point, if the supply side can’t react in a 15-to-30-day period, you’ve got to bid it up to cause people to consume less of it.”
Natural gas tends to rise in the winter and the summer, because it is used for both heating and cooling. The problem is that logistical difficulties make it difficult for the market to adjust to highly unusual weather.
“We had the coldest winter in 100 years this year and had the warmest winter in 50 years in 2012,” Raymond wrote to CNBC.com. “The system isn’t designed to handle these sort of multiple standard deviation events from an inventory management standpoint, as there isn’t enough storage capacity in the ground. This translates into lots of volatility in the short term.”
New developments have made the problem even worse.
“Further exacerbating the issue is that we have moved 20 percent of US daily supply to a very cold part of the country in the winter, the northeast. So when it gets really cold, the supply side is now affected due to well freeze-offs,” Raymond wrote.
(Read more: Low on natural gas, California told to power down)
Finally, many traders have gotten caught on the wrong side of the trade.
“These hedge funds and commodity trading advisors have received large margin calls, thereby further exaggerating the volatility,” Raymond said.
In the longer term, Raymond says that $4.50 to $5 natural gas “provides more than adequate incentive to bring new production to the market.”
But in the meantime, chilly forecasts could continue to drive prices higher. Meteorologists are expecting a return of freezing temperatures next week, which has put a bid under the natural gas market.
(Read more: Nat gas turns sharply higher with winter weather)
Natural gas inventories declined by 250 billion cubic feet in the week ended Feb. 14, according to the government report released on Thursday.