What Drives Natural Gas Prices And How To Find Your Edge as a Trader

Back in 2019-2020, something bizarre happened with natural gas prices in the Permian Basin.

While Henry Hub (the U.S. benchmark) was trading around $3.50/MMBtu, Waha Hub prices in West Texas occasionally went negative. Not just lower, but literally below zero. Producers were paying people to take their gas away (this happened again more recently – more on this shortly).

Source: US Energy Information Administration

This wasn’t some theoretical market anomaly. It was a real-world outcome of various factors driving gas prices – pipeline constraints, booming oil production (with associated gas as a byproduct), and limited local demand.

And it created a monster trading opportunity for anyone paying attention.

As an indie trader, there’s not much you could have done with this scenario from a trading perspective. But I’m telling you because understanding what drives natural gas prices, and more importantly, what creates market dislocations, can help you spot opportunities.

Let’s get one thing straight, though: you’re not going to beat the pros at forecasting overall price direction. The combined brainpower of thousands of professionals with decades of experience and proprietary data feeds makes that a fool’s errand.

You’re exceedingly unlikely to out-predict the broader market. But you don’t need to.

The physical constraints and structural quirks of the natural gas market create pockets of inefficiency that you absolutely can exploit.

So let’s dig into what actually drives natural gas prices and where those exploitable edges might emerge.

It’s Just People Buying and Selling

Strip away all the complexity, and natural gas prices are determined by the same thing as every other market: people buying and selling.

Supply and demand.

To understand what drives prices, we need to understand what drives people to buy or sell natural gas. And to spot potential edges, we need to identify situations where buyers or sellers become desperate or constrained.

Supply-Side Factors

Production Dynamics

Source: US Energy Information Administration

U.S. dry natural gas production has been hovering around 100 Bcf/d (billion cubic feet per day), but this isn’t evenly distributed. The Permian Basin, Haynesville Shale, and Appalachia’s Marcellus formation are the heavy hitters.

Each region has its own economics:

• Permian gas is often a byproduct of oil production, meaning it comes out of the ground regardless of gas prices
• Haynesville wells are expensive (10,500-13,500 feet deep) but produce a lot of gas
• Marcellus has lower extraction costs but faces pipeline constraints to get gas to demand centres

Production disruptions happen, and they’re not always predictable. Cold snaps can cause “freeze-offs” where wellhead equipment literally freezes, instantly cutting supply. The 2025 polar vortex knocked out a significant chunk of Permian production, for example.

These production dynamics create trading opportunities when they intersect with infrastructure limitations. When producers can’t get their gas to market, local prices crash relative to benchmark prices.

Storage as a Buffer

Underground storage facilities are the shock absorbers of the natural gas market. They follow a predictable seasonal cycle:

• Injection season (April-October): Producers pump excess gas into storage
• Withdrawal season (November-March): Gas comes out of storage to meet heating demand

Storage typically peaks around 4,000 Bcf in November and bottoms out near 1,500 Bcf in March. When storage levels deviate from the five-year average, it signals potential price pressure.

This creates a classic seasonal trading pattern. Summer gas typically trades at a discount to winter gas, creating a contango market structure where futures prices increase as you look further out.

But when storage is tight, say when it’s 20% below the five-year average, contango can get extreme. And extreme market structures tend to create opportunities.

Pipeline Infrastructure

Pipelines are the highways of the natural gas market, and just like real highways, they can get congested.

The Permian Basin is a perfect example. The Matterhorn Express pipeline (2.5 Bcf/d capacity) was supposed to relieve congestion, but it hit capacity just seven months after coming online. The result? Waha spot prices went negative again in 2025.

Pipeline constraints create regional price dislocations that can persist for months or even years. The Texas-to-Louisiana corridor constraints have sustained a $0.50/MMBtu spread between HSC (Houston Ship Channel) and Henry Hub.

These aren’t theoretical price differences – they’re real inefficiencies created by physical limitations.

Demand-Side Drivers

Weather: The Great Volatility Machine

If there’s one factor that causes short-term price swings in natural gas, it’s weather. Period.

Over 60% of unexpected demand variation comes from temperature fluctuations. It’s a bigger deal than most people realize:

• A polar vortex can trigger a 300% spike in heating demand
• Every 1°F above normal in summer adds 0.5 Bcf/d of power sector gas consumption for cooling
• Heatwaves reduce renewable output (less wind, solar inefficiency), creating compound demand for gas-fired generation

The weather’s impact isn’t linear, either. A 10-degree drop when it’s already cold has a much bigger effect than the same drop when it’s mild. This non-linearity creates volatility, and volatility creates opportunity.

LNG Exports: The Game Changer

U.S. LNG exports have completely transformed the natural gas market. The US is now shipping around 12 Bcf/d overseas, which equates to 11% of domestic production that’s no longer available for U.S. consumption.

This creates a fundamental tension in the market. Each 1 Bcf/d increase in LNG exports elevates Henry Hub prices by somewhere between 1-2.5%, depending on whose research you believe.

But more importantly, it connects U.S. prices to global events. A cold snap in Asia or a pipeline disruption in Europe now affects what Americans pay for natural gas.

The DOE projects LNG exports could reach 20% of U.S. production by 2030. That’s a massive structural shift with long-term implications for price behavior.

Power Generation and Fuel Switching

The power sector has become the swing consumer of natural gas. When prices get too high (above $6/MMBtu), generators start switching back to coal where they can. Each $1 increase in gas prices reduces power sector demand by around 0.7 Bcf/d.

This creates a natural ceiling on prices, at last, until all available coal capacity is running. Then things can get wild.

On the flip side, environmental policies are pushing more utilities away from coal permanently, creating a structural increase in baseload gas demand. This removal of fuel-switching capability makes the market less elastic and more prone to price spikes.

Industrial Demand

Industrial users account for about 25% of U.S. gas consumption, running at a steady 23.5 Bcf/d. Unlike power generators, they don’t typically switch fuels when prices rise. They just eat the higher costs or reduce production.

This makes industrial demand more stable, but also means it can’t act as a pressure release valve when prices surge. And new industrial development, like the 2.5 Bcf/d projected from semiconductor and battery manufacturing by 2028, creates step-changes in demand that can catch the market flat-footed.

Market Mechanics

Futures Market and Speculation

Henry Hub futures are the global pricing benchmark, with contracts trading 18 months forward. The speculators (hedge funds, commodity trading advisors, and other financial players) can amplify price moves.

According to Anderl and Caporale (2024), when managed money net-long positions exceed 120,000 contracts, it typically precedes a 20%+ price swing. That’s not because the speculators are causing the move, but because they’re anticipating it – and sometimes they’re right.

The market structure (contango vs. backwardation) tells you a lot about the current state of play:

• Contango (forward prices higher than spot): typically signals abundant current supply
• Backwardation (spot prices higher than forward): indicates immediate scarcity

About 50% of price variance comes from expectations-driven speculation. That’s a fancy way of saying that much of the price movement comes from traders betting on what other traders will do.

Tariffs and Policy

Trade policies reshape global flows. China’s 25% duty on U.S. LNG redirected 0.8 Bcf/d to Europe, creating regional price dislocations. Meanwhile, U.S. steel tariffs increased pipeline construction costs by 12%, slowing infrastructure development.

The Inflation Reduction Act’s clean energy incentives accelerate coal-to-gas switching, while proposed LNG export pauses could suppress domestic production by 5.4 Bcf/d by 2030.

These policy tensions create crosscurrents that are difficult to predict but can lead to significant market dislocations.

Finding Your Edge in Natural Gas

Now that we’ve covered what drives prices, let’s talk about how you might actually make money trading natural gas.

Remember, you’re not trying to outpredict the market’s expectations. You’re looking for situations where structural factors or behavioral patterns create exploitable edges.

Regional Spread Trading

Pipeline constraints create persistent price differentials between regional hubs. These spreads can blow out during extreme weather or maintenance periods, creating trading opportunities.

For example, the Waha-Henry Hub spread normally trades around -$0.50 to -$1.00/MMBtu. But when takeaway capacity gets maxed out, it can plunge to -$3.00 or more. If you can identify when these constraints are likely to bind, you can position accordingly.

This doesn’t require predicting the overall direction of natural gas prices, but the relative relationship between two connected hubs.

ICE offer a product called the Waha Basis Future that tracks this spread. I don’t have any insight into how it trades (probably very thinly), but it would be a good place to start investigating.

Calendar Spreads

The seasonal nature of natural gas creates predictable patterns in calendar spreads (the price difference between different delivery months).

Summer-to-winter spreads (like July to January) typically trade in contango, reflecting storage costs and the seasonal demand pattern. But the size of that spread varies based on storage levels and expected weather.

When storage is well below average heading into injection season, these spreads can blow out as the market prices in the risk of not filling storage enough for winter.

Weather-Driven Volatility

Weather forecasts beyond 10-14 days are notoriously unreliable. This creates a pattern where the market often overreacts to initial forecasts of extreme weather, then moderates as the forecast window narrows and becomes more accurate.

If you can stay disciplined and fade these overreactions – selling into weather-driven spikes or buying weather-driven drops – you can catch the reversion. This trade would require careful and disciplined management.

The key is having a systematic approach rather than trying to outguess the meteorologists, and understanding what effect you’re actually trading (the tendency to overreact).

Shoulder Season Transitions

The transitions between seasons, especially October/November and March/April, often create interesting trading opportunities as the market shifts from injection to withdrawal mode or vice versa.

These shoulder periods are when storage operators switch their focus, and weather uncertainty is high. The market can misprice the transition, creating opportunities for traders who understand the physical dynamics.

The Realities of Trading Natural Gas

Natural gas is incredibly volatile. The annualized volatility often exceeds 50% – about three times that of most equity indices. This creates opportunities but also massive risks.

Recent 20-day annualised natural gas futures volatility. Source: TradingView

A few things to keep in mind:

1. Position sizing is critical. Natural gas can move 5-10% in a day on weather shifts. Size your positions accordingly.
2. Options are expensive but useful. The high volatility makes options pricey, but they can be effective tools for defining risk in such a wild market.
3. Liquidity varies dramatically. Front-month futures are liquid, but regional basis contracts or further-dated options will be very thin – possibly making them off limits altogether.
4. Market data matters. The EIA’s weekly storage report (released on Thursdays at 10:30 AM Eastern) is the single most important data point. Natural gas often makes its biggest weekly move in the minutes following this release.
5. Seasonal patterns aren’t guarantees. Yes, natural gas typically rises in winter and falls in summer. But weather variations and other shocks can completely override these patterns.

A Word on ETFs and Retail Products

If you’re planning to trade natural gas through ETFs like UNG or BOIL, be aware that these products suffer from serious structural issues due to contango in the futures curve.

When the market is in contango (which is most of the time), these funds lose money on the roll as they sell expiring contracts and buy more expensive, further-dated ones. This creates a persistent downward bias that has caused UNG to lose over 99% of its value since inception, despite natural gas prices being higher today than when the fund launched.

UNG total returns since inception. Source: TradingView

If you must use these products, keep your time horizon short and be aware of the roll costs.

Final Thoughts

Trading natural gas isn’t for the faint of heart. It’s a complex, volatile market driven by a combination of physical constraints, weather patterns, and speculative flows.

But if you understand what drives the market and focus on identifying structural inefficiencies rather than trying to predict the unpredictable, there are real opportunities to be found.

The keys are:

• Focus on relative value (spreads) rather than absolute price direction
• Understand the physical constraints that create market dislocations
• Don’t fight seasonality, but don’t blindly follow it either
• Respect volatility and size positions accordingly
• Be systematic rather than reactive

Most importantly, remember that at the end of the day, natural gas pricing is just about people buying and selling based on their expectations. You don’t need to predict the weather better than everyone else – you just need to identify situations where structural factors create predictable behavior.

That’s where your edge as a solo trader lies.