Why is Natural Gas Soaring Today? Short Squeeze and Freeze-Off Risks Drive Prices Toward $5.00

Natural Gas Prices Surge Over 20% on Arctic Blast and Short-Covering

Natural gas futures spiked sharply higher overnight as frigid weather patterns forced shorts to cover and encouraged aggressive speculators to buy in anticipation of a surge in heating demand. Prices at Henry Hub jumped over 20% in early trading, building on Tuesday’s 25.91% gain.

At 13:25 GMT, February Natural Gas futures are trading $4.864, up $0.957 or +24.49%.

Colder Forecasts and Short-Covering Drive the Rally

Traders are blaming the price surge on colder U.S. weather forecasts and short-covering as key factors behind the move. Attention now turns to Thursday’s U.S. government storage report and fresh demand figures due in late January.

Weekend Forecast Shift Triggers Aggressive Buying

After hitting a multi-month low last week, prices consolidated for a couple of days ahead of the weekend. However, a gap higher opening Sunday night set in motion the current price spike. The initial move was fueled by a shift in the 10-15 day forecast over the weekend. The sudden shift is driving traders to rapidly adjust heating demand forecasts, catching some bearish bets off guard.

Front-Month Squeeze Amplifies Price Action

The rally comes about a week before the near-month futures rollover from the February to March contract. The front or prompt month is crucial because that is where the physical squeeze hits first. When the front-month contract is set off by weather, prices jump because short-sellers, caught on the wrong side of the trade, will pay almost anything to get out of their positions or risk turning winning trades into losing ones. Typically, utilities and industrial buyers, who haven’t hedged their purchases, often face sharp price increases, and are forced to pay up.

Sharpest Gain Since January 2022

On Tuesday, for example, the jump in February futures was its sharpest gain since January 2022. Traders pointed toward short-covering as the main reason for the price spike after U.S. CFTC data revealed speculative short positions hitting their highest level since November 2024.

Demand Surge and Freeze-Off Risks Loom

Not only is total demand, including exports, set to rise next week with some models showing an increase of more than 200 billion cubic feet in implied demand since Friday, but with more cold weather approaching, Energy Intelligence is warning of potential freeze-off risks. This could produce supply disruptions, new price spikes and potential power outages.

Technical Outlook: Uptrend Confirmed with Key Breakouts

Technically, the trend is up based on swing chart and moving average analysis. After taking out a series of minor tops on Tuesday, momentum was strong enough to break out over the December 30 main top at $4.176 earlier today, sending prices screaming toward the December 5 main top at $5.022. The size of the move has now put the March 2025 top at $5.551 on the radar.

Further confirmation of the shift in momentum and the trend occurred when prices took out the 50-day moving average at $3.989 and the 200-day moving average at $4.247. Both indicators are potential support now.

Caution: Weather-Driven Rally Lacks Strong Base

Despite the bullish outlook at this time, keep in mind that it’s a short-term, weather-driven rally, created by a lot of short-covering so there is no real base built to support a long-term rally. Furthermore, the market can shift quickly to the downside should the forecast models trend warmer, or if production and pipeline flows prove to be more resilient than expected.

What Professionals Are Watching Next

Over the next several days, professionals will be monitoring the price activity in regional cash markets, LNG feedgas flows, and the February-March rollover spread to determine if the physical or cash market is being impacted and whether it spreads to the futures market. Some still feel that it’s just back-to-back cold shots and a market that was extremely oversold causing the exaggerated two-day rally.

More Information in our Economic Calendar.