Natural Gas Has Seen Big Price Swings. Why Investors Should Buckle Up

Natural Gas Has Seen Big Price Swings. Why Investors Should Buckle Up

Since the beginning of the year, the natural-gas market has witnessed some especially huge day-to-day price changes — and it's not just due to the weather.

According to Phil Kangas, Grant Thornton's advisory leader for natural resources and mining, the volatility has also been driven by pandemic-affected demand swings and an increasingly "interdependent" world supply chain for pipelines and liquefied natural gas transport, as well as the push toward renewables.

Natural-gas futures hit their best one-day percentage gain on record on January 27, with the February contract rising 46.5 percent on its expiry day to $6.265 per million British thermal units, the highest level since October of last year.

According to Kangas, the move was prompted by increasing uncertainty in Ukraine, colder-than-normal weather expected in China, and pandemic-related limitations, which "kept investors on edge," as well as low trading activity. Wild fluctuations in natural gas prices have grown increasingly prevalent this year, with prices up about 31% in January and down around 18% this month as of February 9.

"The new normal is born out of the preceding decade of very low returns from domestic shale producers," says Campbell Faulkner, senior vice president at OTC Global Holdings, "combined with the full shutdown of well drilling and completions during the early 2020 pandemic."

He describes natural gas as a "highly seasonal and weather-dependent commodity that is prone to natural corners and price volatility," stating that natural corners arise when prompt futures contracts trade at a larger premium to future delivery months. Natural gas is a "crucial element of the residential energy supply," he argues and is utilized for more than simply cooking and space heating.

Since the fuel's price peaked at a record high of over $15 in late 2005, a lot has changed. In 2007 and 2008, the introduction of better extraction techniques such as multistage hydraulic fracturing or fracking and increased directional drilling capabilities "forever transformed" the natural gas market, according to Kangas. According to him, a supply spike and the 2008-09 recession drove prices down, but natural-gas consumption continued to climb, and the commodity overtook coal as the leading source of power generation in the United States in 2015.

According to the Energy Information Administration, coal had been the primary energy source for generating electricity for decades, but natural-gas-fired power first overtook coal generation on a monthly basis in April 2015.

Natural gas produces far fewer greenhouse gases than coal, and it's "ideally adapted to complement renewable energy" like wind and solar, which can't currently provide reliable power output, according to Kangas. As countries strive for net-zero emissions by 2050, natural gas will play a "transitional role."

Gas-fired electricity will provide a "gap covering flexibility" for power generation as other energy sources come online, he adds, adding that natural gas's market share will expand. Long-term pressure to move away from fossil fuels will continue, according to Kangas, "weaning nations away from natural gas, coal, and oil."

Traders will keep an eye on actions in Ukraine, which serves as a vital transit route for Russian gas to Europe. According to Faulkner, if tensions rise to the point of full-fledged conflict, natural-gas prices in the United States would temporarily rise to around $6.50 to $7 per million British thermal units. However, liquefied natural gas shipments from the United States have reached their maximum and will not be able to bridge the supply shortfall.

For the time being, prices should be "north of $4" for the rest of the year, with periodic dips into the mid- to high-$3.50 region, but they will continue to be unpredictable, he adds.