Why Did the Price of Natural Gas Go Up?

The price of natural gas futures was in a clear uptrend from the very end of April until May 22, when it reached a 4-month high. It is entertaining to read the published reasons for this climb. Many commentators (such as the EIA) attributed it, at least in part, to less supply and more demand, the classic reason for any price increase. The difficulty is that during that time, there was more supply than demand; the amount of natural gas in storage increased every week during that entire interval. By itself, that would cause prices to drop, but the increases were below expectations for this time of year, so natural gas prices increased. That is, at least, plausible. But given the time left before that reserve is needed, such a steep spike is unnecessary. We need to investigate more. Of course, the spot price is not the futures price, but the two do tend to run in parallel, and the futures price will gravitate to the spot price as the contract ends.

Figure 1: NYMEX price of natural gas futures, from 2019 to present, in USD per million BTU; and amount of natural gas in storage

The futures prices have declined since that spike in prices ended on May 22, pulled back for two days (profit taking?), and is now increasing at a somewhat slower pace. Trends tend to extend beyond the always-shifting fair value point, by simple momentum. When the bulls (or bears) take over, retail traders will continue buying (or selling) for longer than they should. A correction is typical. That also explains the pullback.

That leads to the question of why the natural gas prices did go up during that interval. There is more to futures prices than supply and demand, and to spot prices as well. Markets are always looking ahead, and futures prices typically reflect anticipated future costs. Various factors do present themselves, such as a global warmer-than-usual trend that would indicate a potential higher electricity demand for air conditioning. There is also an expectation for a much greater demand for LNG as the world transitions away from dirtier fossil fuels. Neither of those seem strong enough to cause the kind of spike that happened.

There is perhaps some clarification available by looking more closely at the futures prices, specifically at the implied volatility, a number determined by the prices of options on the futures. It is not the same as historic volatility, although both are measures of risk. The graph of the implied volatility for the June 2024 contract futures is given below.

Figure 2: NYMEX natural gas implied volatility

There were dramatic swings in the implied volatility starting just before the spike, and continuing to May 27, and prices rebounded some on May 28. The cause of this swing in implied volatility must be big. Another candidate is perhaps the most obvious one. The market decided that the price of natural gas had been too low for too long and determined to raise the price. The frustrated bulls jumped in, and the price went up fast and too far, accounting for the correction that followed, most likely profit taking by the bulls.

So, which one is it? Of all the potential causes, the simplest alternative is to take them all. No one cause is adequate, but with the large number of individual causes, there is plenty of power in them together. That might seem like the easy way out, but when no individual cause is good enough, it is better than saying it was sunspots.

So, what should we expect from the price of natural gas in the near future? It will probably settle at a price higher than it has seen in February to April, and stay fairly constant, with a mild uptrend as summer approaches and air conditioning ramps up electricity usage.