The Furious Debate in Natural Gas: Is This Market 'Efficient'? 

  • Commodities Analysis
  • Editor's Pick
  • Gas hits 21-month low at mid-$2 level despite freezing temperatures
  • Gas bulls say the plunge is illogical, bears say fundamentals at work 
  • Short sellers point to beefy gas storage, indicating $1.50 gas may come

Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to “beat” the market because there are no undervalued or overvalued securities available.

The above paragraph referenced from Investopedia is most relevant to the furious debate raging on the natural gas market now. 

With the weather reportedly in freezing territory across most of America, prices of natural gas, which heats 50% of the country’s homes, sunk to new 21-month lows Wednesday beneath $2.50 per mmBtu, or million British thermal units, deepening a two-month-long bear market.

To those long gas, or wagering for its prices to rise, the 60% plunge over the past seven weeks during what is theoretically one of the coldest periods of the year is in utter defiance of logic. 

To some still bullish on gas, what’s happening now reeks of conspiracy/manipulation — call it what you like — by hedge funds wanting ever-lower prices to profit from countervailing short bets opened when gas traded at a 14-year high of $10 in August, $7 in December or even $3 in January. 

There’s no official consensus on what these short-selling funds in gas are targeting, but the whisper number seems to be as low as $1.50. While technical charts on natural gas “have been crying in an oversold state, the market has been burrowing lower and lower,” says Sunil Kumar Dixit of He adds:

“If the $2 psychological handle gets broken, a dive into major historical support of $1.50 is possible.”

The last time gas traded in the mid-$1 region was in June 2020.

Natural Gas Weekly Chart

Ask the short-sellers in gas why they’re so bearish and they’ll tell you there’s probably no market that’s reflecting fundamentals better now than this. 

Here are some of their arguments: 

The United States is just coming off the warmest start to a Northern Hemisphere winter in two decades that has created little need for intense indoor heating since the end of Christmas — a predicament that dragged on through most of January.

Gas burns for heating purposes have correspondingly been abysmal in this stretch, they say, often resulting in higher-than-expected balances in weekly inventory readings for the fuel reported by the Energy Information Administration, or EIA. 

For instance, in the latest weekly reading available up till Wednesday, gas in storage stood at 2.729 tcf, or trillion cubic feet, during the close of the week to Jan. 20, up 4% from the year-ago level of 2.622 tcf.

The EIA provides inventory updates every Thursday, with analysts expecting its report for the week ended Jan. 27 to cite a draw of 142 bcf versus the 91-bcf deficit in the prior week. 

Aside from weaker burns, there’s another reason storage balances are higher at this time of year than in 2022: Bumper production of dry gas.

With 100 bcf per day or more in output lately versus draws of 100 bcf per week, the math was just not in favor of gas bulls. John Kilduff, Partner at New York Energy Hedge Fund Again Capital, adds: 

“We could finish winter with storage still about 2-3% higher than year-ago levels as we seem to have bumper production of dry gas as well now.”

Some say that in order to make a meaningful dent on inventories, utilities might have to make weekly draws of 200 bcf for at least three weeks in February — a situation that may not be likely looking at immediate weather forecasts.

And what do those forecasts say?

As of Tuesday, Gelber & Associates, a Houston-based consultancy on energy trading, said major weather forecast models, including the U.S.-based Global Forecast System and the European ECMWF, suggested this week’s cold weather would be limited to the portions of the northern tier of the United States, without meaningfully impacting the southern Plains and the Southeast region.

The trade journal reported on Wednesday that most of the Lower 48 U.S. states were already mired in a days-long stretch of freezing temperatures, and burns by utilities have ostensibly taken a sizable chunk of supply out of storage. 

But turning to data from NatGasWeather, another prominent source for forecasts in the market, the trade journal cited a “much warmer picture by the weekend, with the latest runs shedding heating demand from the 15-day outlook.” It adds:

“In particular, the weather data showed the southern and eastern halves of the United States warming into the ‘very nice mid-50s to lower 80s (Fahrenheit), well above normal by early February standards. What’s more, both the Global Forecast System and European data maintained a much warmer-than-normal U.S. pattern at the end of their forecast runs at days 15-16.”

The one throwaway which that forecast had for gas bulls was temperatures in the coming weeks.

Though snow was already falling in New York City, “the coldest weather still lies ahead”, NatGasWeather said, adding: “This means that production could slide further if additional freeze-offs materialize.”

Based on the outlook of AccuWeather, another forecaster, that could be likely. The forecaster said the surge of Arctic air barreling toward New England and the eastern Great Lakes is forecast to be colder than the outbreak at Christmas time. Portions of the central Appalachians and the Mid-Atlantic region also could be impacted.

“This will be an Arctic blast that will hit hard and fast,” AccuWeather said.

It said that after a high near 40 Fahrenheit on Thursday, Boston temperatures were expected to dip to 10 below zero early Saturday. Highs in the single digits were likely.

At the peak of the cold blast, temperatures could feel as much as 50 degrees below zero in central and northern New England, according to AccuWeather. The real-feel temperatures could plummet close to “an unworldly 100 below zero on top of Mount Washington, NH,” AccuWeather senior meteorologist Adam Douty said.

Frigid conditions are expected to stretch into New York City, Philadelphia, as well as Washington, DC. However, AccuWeather said the bitter weather should leave the Northeast just as quickly as it arrives. Temperatures could surge by 40 degrees by Sunday.

Another bullish element in the works was the impending restart of Freeport LNG, the Texas-based producer of liquefied natural gas. Freeport consumed 2 bcf per day of gas until its sudden closure in June left the market with some 420 bcf of idle supply. Traders are estimating that it could take till late February or even March for LNG shipments to again leave the terminal. 

“Although regulatory snags are clearly a possibility, and Freeport may still not return to full strength until mid-March, the likelihood of more bearish scenarios of a summer restart continue to dwindle – relieving a portion of downward pressure on NYMEX gas futures,” EBW senior energy analyst Eli Rubin said.

But the warmer February outlook might remain a tough hurdle for bulls to jump, said Rubin. He adds:

“While the market is attempting to form a short-term bottom and signs of medium-term fundamental support are emerging, weather remains king in February. The collective weight of recent bearish shifts may drive Nymex gas another leg lower later this month.”

So back to where we began: Is the gas market performing efficiently now?

As Investopedia says, market efficiency refers to the degree to which market prices reflect all available, relevant information. 

If markets are efficient, then all information is already incorporated into prices, and so there is no way to “beat” the market because there are no undervalued or overvalued securities available.

One of the contentions of gas bulls that repeatedly pop up on’s gas trading forum is that there’s a huge racket involving hedge funds, gas producers, weather forecasters — and even the EIA — in manipulating data to push prices down.

Some of the accusers say there is zero truth to the forecasts by the European and U.S. weather models and that HDDs, or heating degree days (a key demand metric for cold weather gas consumption) are constantly shifted around to advance the interests of short-sellers.  

It’s one thing to say a bunch of hedge funds leaning on one side of the market is causing skewed price action. It’s another to accuse the entire industry, including the government — in the form of the EIA — of conspiracy to achieve a certain market outcome.

Having reported on the energy markets for over 30 years has given me my own fill of wild theories and I won’t go down that path with you. 

But I will say this: If there’s indeed an industry-wide conspiracy, complete with government players, to move the price of something, then many would be wise to such a plot and it would be harder to execute it. As the paragraph on market efficiency says, “all information is already incorporated into prices, and so there is no way to ‘beat’ the market” either way. The gas market has fallen for seven straight weeks in a row and there still seems ample liquidity being provided for it to go lower. Something’s not right about this “conspiracy”.

I also know another thing: Markets will, over time, gravitate to their true value. Natural gas bulls may have their day soon. 

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about. 

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