Living in the Midwest, it is second nature to talk about the weather. This winter, the typically introverted populace has been speaking up more than ever. Sustained bouts of extremely cold weather have led to record demand for natural gas and propane, with spot prices and futures prices rising along with the demand spurts. The price of propane is expected to remain high, and major suppliers like Suburban Propane Partners (NYSE:SPH), AmeriGas Partners (NYSE:APU), and Ferrellgas (NYSE:FGP) may be reaping the rewards.

Baby it's cold outside
The first round of the polar vortex took hold across the country in early January and resulted in record low temperatures. Currently much of the country is feeling the effects of round two. With a few months of cold weather remaining for northern states, the demand for heating fuel may decline from the record highs being observed, but it will not altogether go away.

Demand for natural gas in early January across the northeastern U.S. saw unprecedented day-to-day increases of up to 30%, with similar though not as extreme increases seen throughout the rest of the country. The extended cold spell has resulted in a similar increase in propane demand, with several states declaring states of emergency to sidestep regulations that inhibit the interstate transport of propane.

The silver lining
The prices of natural gas and propane have increased along with demand, and in some cases the price increases have seemed disproportionately large relative to demand fluctuations.

In some instances, spot prices for natural gas in the Northeast soared 20x higher than natural gas futures prices. Overall, however, natural gas futures prices are not dramatically higher than they have been over the past year. The ridiculous spot prices may result in quick gains for smaller dealers and distributors, but without longer-term price increases, investors should not necessarily expect the spikes in natural gas prices to equate to significant earnings increases from the biggest production companies like ExxonMobil (NYSE:XOM) and Chesapeake Energy (NYSE:CHK).

Natural gas continues to make up a greater percentage of ExxonMobil's overall portfolio both in terms of sales and production, but daily demand fluctuations are a drop in the proverbial bucket for the company. As the second largest natural gas producer in the U.S., Chesapeake Energy will likewise not see dramatic swings based on daily fluctuations. Both companies, on the other hand, could benefit should the most recent weather-induced increase in natural gas futures prices stick around for a while.

The cold weather story for propane is a little different. The demand and pricing of propane this winter is dependent on more than just the polar vortex. Demand for propane was at a high long before the cold weather hit due to the use of propane as a fuel for heaters that are used to dry harvested corn prior to storage. The corn harvest came late this year, and in an effort to speed up the transition to market, farmers dried more corn sooner after harvest, which put a strain on propane reserves in November. Prices rose accordingly and have remained high as the reason for the elevated propane demand shifted from corn-drying to record low temperatures.

Unlike the situation for natural gas, the elevated prices for propane are not just daily fluctuations, but are being sustained throughout the season. Though propane sales are naturally cyclic, higher prices should translate to a very strong quarter for companies like Suburban Propane Partners, AmeriGas Partners, and Ferrellgas. These companies and others are supplying customers with heating fuel when they need it most, which conveniently coincides with when they are willing to pay premium prices. The true beauty of the situation for these companies is that, while reserves are lower than usual, all signs indicate that there is enough propane available for all customers to receive the fuel they need to make it safely through the winter. Put simply, customers are consuming more propane, and they are paying more for the propane that they consume.

The takeaway
A well-timed investment in propane may take a little of the sting out of the cold. Record high demand for natural gas and propane have led to higher prices, with producers and suppliers of the fuels standing to gain from the bitter weather. The gains seen by propane suppliers look especially promising due to pricing and consumption that will be sustained above projected levels.