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Natural Gas Is Taking a Major Hit

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Natural gas prices have dropped 9% since the end of May due to unseasonably cool temperatures and the scrutiny of this coming hurricane season after a stormy 2012.

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Natural gas has been one of the most watched commodities of the past five years. After bottoming out following the 2008 recession, the fossil fuel has managed to claw back some of the ground it gave up. Many were hoping that this summer would solidify that run higher, but those who did had their expectations tempered, as the commodity has been among the worst performing over the last two weeks. Natural gas prices have dropped more than 9% since the end of May, as a number of factors have combined to hit prices hard.

Weather Putting Pressure on Natural Gas

The biggest reason why NG has bucked its seasonal trend of making a run higher through out May and June has been cooler than average temperatures across the US. With cooler temperatures, there has been less demand for NG-powered cooling devices that often dominate summer consumption. As a result, last week's EIA Natural Gas Inventory report showed an increase in stockpiles to levels that are 23.5% above their five-year average.

NG, which is already known for exhibiting hefty volatility, has been stuck in a downward spiral for nearly two weeks, but the drop presents an entrance point for those looking for an enticing play.

Potential Rise for Natural Gas

First and foremost, weather patterns will be key when it comes to the price movements of NG. Traders typically keep their eye on the 10-day forecast for the country and tend to react to that. In other words, if a warm-up is forecasted to start 10 days from now, NG will likely see a fair amount of buying and a nice jump in price.

The second factor that could send NG higher over the next few months is also a weather phenomenon. It is the beginning of hurricane season and judging from the severity of some of the storms that hit last year, 2013′s season will be under a microscope. Hurricanes often disrupt supply levels of NG as pipelines and rigs can be temporarily shut down. As many traders are aware, a drop in stockpiles for NG almost always translates to a healthy jump in price; if a hurricane disrupts new supply from coming in, the consumption from the rest of the country would more than likely cause inventory levels to drop.

As always, NG will be as fickle as the weather patterns across the country, but those who keep a keen eye on forecasts could end up with a trade that yields a handsome return.

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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.
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