I have a confession to make. Although I have been long natural gas since last year, in October I wrote about how I was doubling up my position into the correction that took the front month from $3.50 down to $3.00 (TOOL OF THE MONTH). I argued natural gas had run up from $2.40 to $3.50 in a little more than half a year, and in the process had attracted the undesirable overly confident speculative community. But with the quick 50 cent collapse in the second half of October, I figured the price action had shaken out the weak late longs, and it was safe to buy.

Well, I thought wrong…

I had some other trades working for me, so like a mope I held on through the price decline in natural gas. After all, natural gas was declining mostly because of the unusually warm North American autumn. Surely the cold weather would quickly return and nat gas could resume its bull run.

Well, I waited for the cold weather. And waited, and waited… Instead of chilly weather descending upon North America, the crazy warm temperatures continued. Although I was grateful for some truly glorious days at the cottage this fall, the weather crushed my nat gas position. Those ended up being some expensive weekends.

The weather has been so abnormal the North Pole is now 36 degrees (Fahrenheit) above usual temperatures for this time of year.

To get a sense of the scale of this abnormality, have a look at this graph of sea ice through the past four decades:

I am actually surprised natural gas isn’t down even more. As would be expected, the number of heating days is off the charts. Here is a great graph from Reuters’ John Kemp:

The other day I saw RealVision TV founder Raoul Pal get in a twitter debate about global warming. He was taken aback about the hostility from both camps. He concluded that he now knows better than to try to rationally discuss global warming on twitter.

I have no desire to debate global warming. I am not concluding this strange fall weather pattern is, or is not, the result of global warming. Who cares? Convincing you won’t do squat about my nat gas position.

Although you might argue global warming affects the long term price of nat gas, it is important to differentiate between climate and weather. According to NASA:

The difference between weather and climate is a measure of time. Weather is what conditions of the atmosphere are over a short period of time, and climate is how the atmosphere “behaves” over relatively long periods of time.

And if there was ever a mean reverting price series, it is weather.

So even as everyone frets about the warm weather of the past month, I am confident the cold will come, and soon enough the past warm month will be quickly forgotten.

Look closely at the chart above. If the forecast is correct, next week we will have already made up the deficit of typical heating days.

I am still optimistic about the long term fundamental outlook for natural gas. I know this is committing a trader’s cardinal sin, but I am adding to my losing trade down here. Too many traders are confusing climate with weather. I expect nat gas to be back near the highs before the winter is over.

Thanks for reading and have a great weekend,
Kevin Muir
the MacroTourist