You only have to open your latest heating bill to realize natural gas is near multi-year highs.
Right now, natural gas is currently trading around $5 per million British thermal unit (mBtu), up more than 7% in the past week. According to Dennis Gartman, editor and publisher of The Gartman Letter, the price of natural gas can move much higher, particularly if it’s the subject of a short squeeze.
When a short squeeze occurs, a security or commodity is sold short but must be bought back at a later date to close out the short position. If there are too many short positions and not enough inventory when those positions come due, short-sellers are forced to buy the commodity or security at a higher price.
“The one thing I’ve learned in nearly 40 years of being in markets is when you get a short squeeze,” says Gartman, “pick a number – anything is possible.”
Gartman cites short squeezes in wheat and crude oil back in 2008 as recent examples of large short squeezes that caused those respective commodities to shoot up in price; West Texas Intermediate crude oil, for example, shot up from $100 per barrel to $125 during one such short squeeze, says Gartman. In June of 2008, it reached a record $143.68 per barrel.
“We’re seeing the same thing in natural gas right now,” says Gartman. “We got up to nearly $6.50 on the spot month. If you told me that it [will go] up to $10, I would not be surprised. When you get to short squeezes, anything – truly anything – is possible.”
Gartman believes the days of $2, $3, or even low-$4/mBtu natural gas are behind us. “Once we get through the winter,” says Gartman, “we’re going to have less than one trillion cubic feet of nat gas in storage, which is a very, very tight circumstance. You could actually get down to 900 million feet of natural gas, which is just – I hate to use the word – an unconscionable and frightening level.”
(Watch: Commodities Next Week: $7 nat gas?)
Because natural gas is also used as a marginal supplier of energy during summer months, low inventories now could lead to higher-than-average prices in the summer, he believes. Gartman thinks that it won’t have an effect on the stocks – so long as it stays below $10/mBtu. However, based on the price of natural gas futures contracts for later months, Gartman sees it staying below $5.50/mBtu.
“I think the impact, although consumers will wail and gnash their teeth at the cost of their heating bills for the winter,” says Gartman, “[is] not going to be that egregiously expensive over the broad protracted period of time. That’s not terribly detrimental to the economy.”
Yet all that could change if there’s a larger short squeeze or a crackdown on fracking production.
“Can you get through protracted periods of $7 and $8? Two years down the line, we could,” says Gartman. “That’s expensive.”
To see the full interview with Dennis Gartman and his take on natural gas, watch the video above.