Four Reasons Why Nat Gas Could Sell Off
Natural gas has been on fire lately. On Wednesday, it hit the highest level since September 2011, and it's risen an incredible 113 percent since April.
So can nat gas keep running higher?
Addison Armstrong wouldn't bet on it. The senior director of market research at Tradition Energy told CNBC.com a sell-off is a short way off. Here are the four reasons why he's bearish.
(Read More: Cheap NatGas May Not Last)
1. Demand Tends to Be Lower in the Spring
Armstrong said natural gas prices tend to drop in the second quarter. To understand why that is, just go outside.
"Air conditioning demand hasn't kicked in yet, and we're not using natural gas to heat our homes and offices," Armstrong said. "So that's a normal seasonal pattern that we think is going to weigh on the markets going forward."
2. Nuclear Power Will Come Back
Lately, Armstrong said, "demand for natural gas has been higher from electricity generators, because much more nuclear capacity has come off line for maintenance than is normal or expected. But because generators have done some of this maintenance or refueling early, we'll have much more capacity online in the second quarter."
More nuclear power means less demand for natural gas, which naturally means lower prices.
3. Fewer Plants Will Replace Coal with Gas
A big trend that we've seen in the natural gas market is power plants switching from coal to natural gas for cost reasons. But "natural gas prices are now very high, and coal prices are very low," Armstrong said. So we won't see the natural-gas-for-coal switching that we normally would.
4. End-of-Quarter Profit-Taking Will Kick In
In a factor that could hit the market before any of the others, Armstrong expects to see a great deal of end-of-quarter profit taking. Simply put, people who have been long nat gas have made a lot of money this quarter–so they will want to sell out of their positions to lock in those gains.
OK. So now that we know why Armstrong thinks nat gas will fall—how steep of a drop does he predict?
"We think that it's totally likely that we'll see a pullback on the magnitude of 10 percent, taking the market down to $3.50 or $3.60," he said, adding: "And that might happen pretty quickly."