×

Trading The Weather: Betting on Snow and Storms

Heavy storms have whacked the Northeast, with nearly two feet of snow expected to fall on New York by Saturday. So how do you trade the weather?

cleaning_snow_off_car_200.jpg

Commodities traders look at natural gas futures and, no surprise, natural gas prices were a little higher today, but turned flat midday. Why?

Some traders may be buying the storm, but private forecasters at WSI predict it may get a little warmer in the eastern two-thirds of the country over the next week. Being socked by snow hasn’t helped natural gas prices much this month.

Natural gas futures — and exchange-related products U.S. Natural Gas Fund and Barclays Ipath DJ-UBS Natural Gas ETN — have plunged about 12 percent in this month.

“Natural gas prices, as if wounded by the resiliency of domestic production, continue to weaken despite steady draws on inventories that well exceed last year's pace,” analysts at Barclays Capital wrote in a note today.

Technically, the charts are bearish, says MF Global’s Mike Fitzpatrick, who expects $4 natural gas to be tested very soon. Optimists at the U.S. Energy Information Administration see natural gas futures averaging $5.37/mmBTU this year. If you’re betting on higher natural gas prices, instead of futures and ETPs, you may want to take another look at natural gas stocks, like Chesapeake Energy , Southwestern Energy and Williams Companies .

You can also bet on the actual weather — temperature as well as the likelihood of hurricanes, frost, and snowfall. Trading weather derivatives is a far less traveled road and not very liquid, but those businesses looking to transfer risk ahead of the storm season or bet on short-term outlook may use these products.

Market makers in these products include reinsurance companies, energy and commodities hedge funds and energy users. One broker I talked to pegged the weather market as a $8 billion business.

Still, weather is a very thinly traded market. The CME does offer futures and options tied to temperatures — and even snowfall — in major cities in the U.S. and Europe. While trading in the natural gas market averages about 200,000 contracts a day, average daily volume in CME weather derivatives was only about 1,800 contracts last year.