Air conditioners are running full blast in California as a heat wave grips the state, pushing up spot electricity prices to its highest seasonal level in six years and providing a litmus test for natural gas prices and related exchange traded funds for the summer months.
The National Weather Service issued a heat advisory for California Monday, warning that some areas could rise to 100 degrees Fahrenheit, or 38 degrees Celsius, Bloomberg reports.
Given the state’s heavy reliance on gas-generated electricity, the heat can provide a good indicator for how gas prices will react over the summer months.
“This will be a fairly good test of the market being that it is early to get this kind of heat and our eyes should be focused on California given their lack of hydro and lack of nukes,” Stephen Schork, president of Schork Group Inc., said in thee article. “We’re going to get greater volatility and greater prices for gas and power.”
California is dealing with a record drought that has diminished hydroelectric supplies. Additionally, Edison permanently shut down the San Onofre nuclear facility in January 2012 due to safety concerns.
Natural gas prices remain elevated after a series of polar vortex storms increased demand over the winter months and push gas inventories to record lows. West coast gas inventories were 203 billion cubic feet in the week ended May 2, or 37% below the five-year average and 41% below year-over-year levels. Supplies touched a 10-year low in late March. [Natural Gas ETFs Find Support as EIA Raises Forecast]
The early heat “is what everyone feared,” Schork added. “We’ve slashed our nuclear capacity and the state is absolutely vulnerable to demand spikes.”
Natural gas prices, though, have been dipping over recent weeks. NYMEX gas futures traded around $4.37 per million British thermal units Tuesday. The United States Natural Gas Fund (NYSEArca: UNG) has declined 5.8% and iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ) dipped 7.9% over the past week. Nevertheless, natural gas still remains one of the best performing assets this year, with UNG up 18.5% and GAZ up 15.1% year-to-date.
Meanwhile, leveraged natural gas ETFs, including the VelocityShares Daily 3x Inverse Natural Gas ETN (NYSEArca: DGAZ) and the VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ), have been among the most popularly traded geared-commodities ETFs this year. [Inverse, Leveraged ETFs Hit Another AUM Record]
For more information on the natural gas market, visit our natural gas category.
Max Chen contributed to this article.