When it comes to natural gas prices, traders see regular patterns of price fluctuation throughout the year. These patterns reflect the seasonal changes in weather.
Seasonality plays an important role when analyzing natural gas supply and demand. It helps gas producers, storage facilities and energy utilities manage their physical volume exposure as well as financial price risk in the market. By anticipating seasonality, they can adjust their operations and look to reduce their financial risks. Supply, demand and storage are the three major factors used in analyzing natural gas seasonality. Gas production is relatively stable, but may experience unexpected disruptions such as unscheduled pipeline maintenance, explosions or extreme weather.
In the United States, the gross production of natural gas has increased steadily over the past five years.
Within each of those years, seasonality plays a small role in production level changes. Seasonality patterns appear regularly on storage and consumption volumes, where there is a relative high price elasticity. This means storage levels and gas consumption respond quickly to market price changes.
You can see seasonality in this chart of U.S. monthly underground storage of natural gas. Storage levels tend to be highest between the end of October and mid-November, during the lead up to winter, and lowest at the end of winter after a season of high consumption.
When you look at consumption, heating and cooling demand are the main drivers for the cyclical pattern. In winter, the increase of space heating for both residential and commercial use leads to the surge of demand of natural gas. During the summer, use of natural gas is much lower due to summer cooling through air-conditioning. Other factors may influence the demand of natural gas, including climate change and the price of competing generation fuels sources such as coal and fuel oil. We can see the seasonal curve of storage matches the consumption curve. One of the most liquid futures contracts, Henry Hub Natural Gas futures, shows a distinct seasonal pattern. The cyclical change of production, storage and consumption are reflected on the price of this derivatives contract.
Having a general understanding of seasonality in natural gas markets and the potential impact on gas prices is important to anyone planning a natural gas trading strategy.