IGS Energy Market Insights: An Update on the Natural Gas Market

CI.EN.BG PJM Price Formation (1)

As we head into some of the coldest days of the year, the natural gas market continues to experience historic volatility.

In the final week of January, on the expiration day for the February 2022 contract, NYMEX posted an intra-day high of $7.40 per MMBtu – more than $3 above where it had settled the day prior.

At expiration – which establishes many monthly rates – the February 2022 contract finished above $6, up 46.5 percent on the day.

This price fluctuation wasn't simply a surge – it was the largest single-day price move in the history of natural gas futures trading.

In this article, we discuss what's behind the recent price jump, as well as what actions businesses can take to protect themselves from rising prices.

What's driving changes in the natural gas market right now?

Last October, we saw a 12-year high of $6.30 per MMBtu, but natural gas futures dropped more than 40 percent in December before the end of January/early February rally. So, what's behind this recent price jump?

While uncertainty around winter weather – and the impact extreme weather events can have on demand and, in turn, storage inventories – there's more to the story than cold temperatures.

Frantic trading at expiration was behind the price hike, though this represents activity from a smaller group of futures traders, not necessarily the broader natural gas market.

Other factors leading to uncertainty in the market include:

  • Domestic natural gas production has dropped since the start of the year.
  • Prices in Europe remain much higher than in the U.S. ($30-$40 per MMBtu), resulting in a steady increase in exports of liquified natural gas (LNG) abroad.
  • A potential conflict with Russia, which is a major supplier of natural gas to Europe could put pressure on price.

Changes in Natural Gas Storage

In late January, the Energy Information Administration (EIA) reported a withdrawal of 219 Bcf from underground storage, resulting in natural gas inventories that are 11 percent less than they were compared to the same period last year – and 1 percent lower than the 5-year average.

This comes on the heels of promising news in late 2021, as storage levels returned to the 5-year-average after a volatile autumn. The anticipated cold weather also amplified expectations for large storage withdrawals.

What does this mean for customers?

Regardless of the forces behind the recent price surge, millions of consumers will be impacted. Natural gas consumers who aren't protected by a fixed price strategy should expect their February bill to reflect this higher price.

And, as coal retirements continue to grow, the price of electricity is more connected than ever to natural gas prices – and may rise in tandem.

For customers with the option to choose a fixed long-term energy strategy, now is the time to weigh the options. There's a greater chance of long-term prices trending higher than dramatically lower.

For those considering a long-term strategy, winter 2024 and 2025 should be considered.

Protection from price volatility

Long-term energy prices are still affordable and should be considered carefully by energy buyers. And considering the increasingly global demand for natural gas, there's an incredible opportunity now for energy buyers to lock in long term at the lower prices.

Future winters are not moving as dramatically as the near term, and winter 2023-2024 is up only about $0.25 since the start of January. Winter 2024-2025 and Winter 2025-2026 are both up less than $0.10. With future winters trading below $3.75, there's a great opportunity to secure a long-term rate at below current trading levels.