Natural gas ($natgas: chart) prices have taken a slide lately, mostly due to the storage levels at year over year highs.

Those interested in the futures markets may note that the volatility in the natural gas futures market requires a strong stomach.

Like many commodities, natural gas prices are heavily weighted in speculation; driven by geopolitical forces as well as the all mighty mother nature.  While there isn’t a sole on Earth that knows for sure what the nature of our geopolitical status will be in the future, there are a few out there that make a healthy living on predicting the weather.

Hurricanes cause a spike in the price of the commodity due to supply worries.  Cold winters tend to cause a more gradual and lengthy uptrend through the cold winter months, and then tend to cool off… err, warm up, as the spring temperatures do the same.

It’s tough to predict a hurricane forecast, the forecast for this year had been revised twice already, lowering the number of hurricanes we should see this season by a significant percentage.  As for the weather, the Farmers’ Almanac does a fairly good job, hitting cold weather forecasts on the head 80% of the time.

The almanacs’ forecaster, Caleb Weatherbee, says it’s gonna be a cold one up and down the East coast, but also through the northern plains, with increased snow fall levels through the Midwest.  All places that rely heavily on natural gas for heat.

For the futures players, this forecast spells volatility, and nothing says cha-ching to a speculator more than a cold forecast and a naturally volatile market.  While trading natural gas futures takes a sizable chunk of money just to buy one contract on the NYMEX, options contracts are not only require a lower initial capital to get in, but also offer less volatility than trading the futures themselves.

For the stock players, natural gas companies like Southwestern Energy (SWN: chart, web) and XTO Energy (XTO: chart, web) are good pure gas plays.  Chesapeake Energy (CHK: chart, web) is a good pure natural gas play, but as I’ve said before, I’m not a fan of their way of doing business.  Offering up shares to pay off debt when you’re rolling in the cash from hedge positions is no way to make friends in the investment community.

So while current supply levels are nearing capacity, a cold winter will surely take a chunk out of that supply and add to your bottom line.

Take note, however that even the Farmers Almanac gets it wrong sometimes, and much like gambling on the hurricane forecast, placing your chips on old man winter eat your lunch.

Additional Resources
Trading Natural Gas Futures at the NYMEX
GasTrader.net
WTRG Economics
Bloomberg Energy Prices

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