When the weather outside is frightful, natural gas bulls are delighted. And as new forecasts predicted more cold weather ahead, natural gas traded up to six-week high.
“It’s been much colder this year, and as long as the weather pattern calls for colder temps, I will not be shorting this market,” said Anthony Grisanti of GRZ Energy. “Instead, I will be looking for dips to buy.”
Because people use natural gas for heating in the winter and cooling in the summer, the market is extremely beholden to weather forecasts.
“What you will see is that nat gas prices will tend to spike in extreme weather of either variety—hot or cold,” said Michael Khouw, managing director at DASH Financial and a former trader of natural gas futures and options. “When it gets extremely cold, you expect natural gas demand to increase.”
Weather is “extremely important” to natural gas, said Stephen Schork, editor of the Schork Report. “If the weather turns, it’s going to have a significant impact on the cash market in the next day, and will certainly spill over to the futures as well.”
And as anyone who has tried to plan a picnic three weeks in advance knows, acting on short-term forecasts makes a lot more sense than listening to longer-term prognostications.
“A one-week forecast is reliable, two weeks is a stretch, and anything above that is tantamount to rolling a die,” Schork said.
In fact, so great is the need for short-term forecasts that “all the people who are trading nat gas significantly have private meteorologists,” Schork told CNBC.com. That gives them “much more timely information, because the government only updates forecasts once or twice a day.”
Khouw said that chilly weather can lead to huge moves in the commodity.
Natural gas is “only moderately storable,” Khouw said. “Nat gas takes up a lot of space. So while we’re producing as much nat gas as we ever have, and we are going to store everything we can, we can still have significant volatility, simply because you can have short-term periods of extended demand outstripping supply. You could see sharp spikes, and those spikes will be short-lived, but if you’re in it, that’s when all the money is made or lost.”
For Khouw, one day in particular will always stand out.
“When I traded nat gas, it went from $6 to $12.50 in about two hours,” Khouw said. “I had never seen anything behave like that in my life.”
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And perhaps out of a concern that huge weather-related swings could be ahead, Grisanti refuses to get short just yet.
“Yes, there might be large contracts to sell at the beginning of 2014, but that is a month away,” Grisanti said. “And everyone who trades these markets knows that one month is an eternity.”