Price Continues to Soar as Severe Winter Shortage Looms

Natural Gas, Energy, Gas Prices, Inflation – Talking Points

  • US natural gas prices hit fresh 7-year high above $6.00 mmBtu
  • European and Asian prices continue to rise amid widespread shortage
  • Worries over a colder winter period also fueling recent melt up

Natural gas prices briefly traded above $6.00 million British thermal units (mmBtu) as traders took stock of global shortages and fears over a colder winter season. Front-month Henry Hub futures contracts briefly gained by roughly 10% before cooling off in the afternoon session. By breaching the $6.00 mmBtu threshold, US natural gas futures traded into territory not seen since 2014. Along with the fundamental catalysts pushing prices higher, Tuesday’s expiration of the October futures contract could see traders closing out bearish positions.

Speculation in the natural gas space remains rife, with so much uncertainty surrounding the upcoming winter period. Known as the “widowmaker,” the spread between March and April (2022) contracts rose to a record high this week. The trade centers on the difference in premium between March delivery and April delivery, which translates to a direct bet on supply levels at the end of the winter period. This spread is notorious for violent price swings, given its reliance on weather systems over the winter season. The name “widowmaker” comes from multiple billion dollar hedge funds being put out of business due to sudden violent movements in the price of gas futures. Fears of a cold winter season have pushed spreads to elevated levels, with traders stepping in heavily to purchase $9 and $10 options for January and February, respectively.

Natural Gas 4 Hour Chart

Chart created with TradingView

While prices in the US sit just below $6.00 mmBtu, LNG prices across Europe and Asia are approaching $29 mmBtu. Demand in Asia continues to be robust despite China’s recent slowdown, and European stockpiles continue to run perilously low. Despite supply being limited due to storm systems battering the Gulf region, the US can only turn about 10.4 billion cubic feet per day (bcfd) of gas into LNG per day. With US LNG coming at such a discount to its global peers, demand for US natural gas exports may remain elevated for the foreseeable future. According to Refinitiv, domestic demand for US gas is estimated to rise to 82.8 bcfd as homes and businesses begin to use heating sources.

In my previous natural gas piece, I highlighted the constructive fundamental outlook for higher prices. With near-term levels having been achieved, market participants should continue to reevaluate the fluid situation across the globe. While fundamental catalysts remain the same, the influx of speculative behavior in near-term futures and options adds another layer of complexity to price action. Price may be subject to violent swings, should supply come back online or the winter season prove to be warmer than expected. That being said, US natural gas futures may look for a retest of the 2014 high at $6.493 given the current fundamental construct.

Natural Gas Weekly Chart

Natural Gas Chart

Chart created with TradingView

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— Written by Brendan Fagan, Intern

To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter

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