We've asked it before and we'll ask it again: What is up with natural gas these days? Stockpiles are at all-time highs and prices near their lowest point in years, and yet natural gas ETFs like the U.S. Natural Gas Fund (NYSE Arca: UNG)—which has traded with as much as a 20% premium—just keep climbing. What gives?

It comes back to demand—or the lack thereof, says Christopher Jylkka, principal and manager of Boston Energy Trading, LLC and regional director of energy market intelligence firm Enva. With over 12 years' experience in the energy industry, Jylkka is an expert in the trends and fundamentals currently shaping the natural gas markets.

This week, HAI Associate Editor Lara Crigger chatted with Jylkka about natural gas, including the problem of winter storage space, whether the contango will continue and the alternatives to UNG.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Lately, we've seen record stockpiles of natural gas, and some people predict we may run out of winter storage space. Do you think this will happen?

Christopher Jylkka principal/manager, Boston Energy Trading, LLC; regional director, Enva (Jylkka): I do, and here's why. Most of the remaining storage capacity is controlled by LDCs, or "local distribution companies." These LDCs are either investor-owned or public gas systems [owned by the government]. LDCs are usually trading hubs, so the wholesale gas goes to the LDC point, and then from there, it goes on to the consumers.

Most of the storage capacity is controlled by LDCs, not producers. Producers really don't have control over what goes into storage. In the East, where most of the unused storage capacity lies, that is controlled by LDCs, who have to report to a public utility commission on their rates and the timing of their injection. They can't just look at the market and act, if they think they can get a better deal next month. They file their injection plans months, sometimes even a year, in advance.

So just because there's plenty of room in the East doesn't necessarily mean we won't have an overflow problem, because people in the producing regions in the West—the most full region of the country—can't use that storage. It's controlled by the LDCs. That's why you have gas being so much more volatile than almost any other commodity, and you have electricity being even more volatile, because of the storage issues around it.

Crigger: How does that affect natural gas pricing?

Jylkka: If storage does fill up—and it is on track to do that—these next five weeks or so are going to be very, very interesting. It will affect prices violently.

September is the lowest-demand month for natural gas, and it's also the lowest-demand month for power. September is maintenance season for power plants all over the country. You also have industrial demand, which is about 30% of total gas demand. Refining is a big portion of that, and September's also refining turnaround season as well. So gas demand's going to be very, very low, which is just going to exacerbate the issue.

So if it does happen, and we do run out of storage, it could drive natural gas to $1.00 or even lower. I'm not saying we're going to get there. But if all the stars line up, it could get really ugly. People look at historical charts and say, "Well, gas has never been this low, and the oil/gas ratio has never been this extreme." But it can always get more extreme.

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