David Sterman

Natural gas prices have been depressed for just a few years, but it feels like a lot longer. Numerous analysts (myself included) have tried to spot the bottom for this clean, abundant energy source, angling for the moment when supply comes down to -- and below -- the level of demand.

Back in January, I noted that this commodity might finally buck up once the domestic natural gas rig count slipped below 725.

By then, natural gas prices had slid from $6 per thousand cubic feet (MCF) to about $2.50, but the bottom wasn't in yet. The rig count kept falling, piercing the 700 mark and then the 600 mark, and still, gas prices couldn't find a floor. (The rig count now stands at 534 if you're keeping score.)

Yet just as most investors have thrown in the towel, they may have missed an important turn. Look at this two-week chart for natural gas.

Since late April, natural gas is up more than 40%. 

It's safe to say that almost no one saw this coming.

Why the spike?
Gas has been in an uptrend for precisely the reason you'd expect. Demand is steadily rising (thanks in large part to the ongoing switch at power plants from coal to gas), and supply, if not shrinking, at least is no longer surging. The most recent price gains, which began on June 14, came from a U.S. Energy Information Administration report that highlighted a 67 billion cubic feet build in gas inventories, which is unusually low (compared with the more normal 88 BCF) for a period that is typically characterized by weaker demand ahead of the peak July and August summer season.

The fact that it has been unusually hot in much of the United States in recent days (and expected to stay that way for awhile) is leading gas traders to expect a faster-than-normal drawdown in inventories in the weeks ahead. 

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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