Barrons: Why Sunspots Will Warm Natural Gas Market


By SIMON CONSTABLE
A decline in the number of spots on the sun could warm up the market for natural gas.
These spots, which scientists have observed for centuries, are caused by changes in the magnetic fields on the solar surface, the National Aeronautics and Space Administration says. Scientists aren't sure why, but when the number of visible spots declines, temperatures on Earth tend to be lower. This matters for investors because the sun is entering another period of fewer spots.
You can profit from this situation if you focus on two things.
FIRST, TRACK THE NUMBER of sunspots. It isn't a random number. Rather, the count rises and falls in a fairly predictable cycle. Nineteenth-century British economist William Stanley Jevons noted that the pattern of business cycles in the United Kingdom seemed to coincide with the regular ups and downs of the solar cycle. His discussion of the phenomenon appeared in 1878 in the scientific journal Nature.
There is a high correlation between global temperatures and the number of spots observed on the sun, says Don Coxe, proprietor at Chicago-based Coxe Advisors. Case in point: from 1645 to 1715—an abnormally long solar cycle—sunspots all but disappeared, and that coincided with a mini-ice age when, among other things, England's River Thames froze.
These days the cycle is about 11 years, says David Hathaway, a scientist at the NASA Marshall Space Flight Center in Huntsville, Ala. "We are now in the smallest sunspot cycle in 100 years," he says.
The peak of the current cycle will be about 67 spots, says NASA, which would be the lowest number since 1907, when the cycle reached only 64. That also coincided with lower-than-average U.S. temperatures.
Hathaway says the spot count should decline from here as the cycle plays out. He posts regular forecasts on the spot count on the Marshall Center website—solarscience.msfc.nasa.gov/predict.shtml—if you want to track it.
It's worth noting that Hathaway says there is an "observed relationship" between temperatures on Earth and the sunspot cycle, but he says there are lots of other factors involved in determining climate, such as volcano activity. In short, correlation doesn't equate to causation. Still, if the correlation holds and the temperature drops, you are halfway to making money.
SECOND, TRACK THE NATURAL-GAS market, Coxe says. "You can assume because of the low level of sunspot activity that we will have colder winters and shorter growing seasons than expected," he says.
Those colder winters will drive up natural-gas prices, as people use more of the fuel to heat their homes and businesses. In 2008, temperatures fell an average of 1.4 degrees Fahrenheit for the year, and natural-gas prices rose 25% in the winter months. That year the sunspot count dropped close to zero.
In addition, the shorter growing seasons for crops will also drive up demand for natural gas to make more fertilizer. Natural gas is used to make nitrogen-based plant food, which is vital to growing corn and rice. Typically, a shorter growing season means more fertilizer is required.
Natural-gas futures closed Friday at $3.56 per million BTUs. 
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