Colder Temperatures Drive Up Demand for Heating

Chris Lewis
Chris Lewis

8 November 2019

3 min read

Oil and gas industry

  • Northeastern US sees plunging temperatures
  • Largest consumer of natural gas in the world
  • Cyclical trade opportunities

The temperatures in the United States, specifically in the northeastern part of the country, dictate a lot of what happens next with the natural gas markets. There is a cyclical trade every year that sees natural gas spike rather drastically towards the end of the year, as more demand enters the picture for natural gas.

Natural gas is one of the major ways in which Americans heat their homes. It’s also very popular in Europe, where it has the same cyclicality.

With temperatures plunging over the last couple of days in the northeastern part of the United States, it’s likely that energy markets will continue to be affected. The demand for natural gas is crucial, as it is an oversupplied commodity. At this point in time, the Americans have more than 300 years’ worth of natural gas in the ground that they know of, and they are finding more of it every day. Canada has even more.

In other words, 14,000,000,000,000 ft³ of natural gas in the United States waiting to be extracted will keep a bit of a lead on the market in general. However, this isn’t to say that there will be the occasional spike, which is what we are starting to see already.

Cycle of demand

The cycle of demand typically runs into the early part of January. As a result, a lot of traders will jump in and take advantage of what is one of the easiest trades of the year. However, you should also pay attention to the heating oil futures markets because they will also be in high demand this time of year, as it is also one of the major ways that Americans can heat their homes.

pay attention to the heating oil futures markets because they will also be in high demand this time of year

That being said, this is a late-year “smash and grab” kind of scenario that most traders like, padding their portfolios by the end of the year. This is especially true with CTA people, or Commodity Trading Advisors, who trade derivatives for other people as a money manager.

Week-by-week

The heating markets, both the heating oil and natural gas variety, pay attention to the weather reports coming out of the United States on a weekly basis. The crude oil markets don’t follow along, although there are times in which crude oil will move in sympathy as energy demand picks up in general.

The last three months of the year tend to be very good for these markets, and the pattern is starting to repeat itself again.

Lately, natural gas has been very explosive to the upside. Although inventory numbers came out a little more bearish than anticipated this past week, the reality is that the supply is dwindling. With temperatures dropping this past week, that number as far as supply is concerned should continue to drop from here. This makes the heating sector very attractive to the trading community, be it futures or ETF markets.

Chris Lewis
Written By
Chris Lewis

Proprietary trader of currencies and futures, Chris has been a financial markets writer since 2008 and has helped traders globally in his role as educator. Father of two Chris enjoys baseball and building trading strategies. Read Chris' Bio

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