It’s well-publicised the surging natural gas price is causing havoc worldwide. However, history says things could get much worse. Those of us that have a background in commodities are well aware of the volatility of nat-gas prices. As a junior broker on a busy commodities desk, my line manager told me to be particularly careful when handling derivative contracts, labelling nat-gas ‘the widow-maker’. The reason being, when the price moves, it often does so without warning, in a violent manner for extended periods.
A classic example of this was in 2006 when hedge fund Amaranth Advisors imploded after losing $6.5 billion in two weeks on an overleveraged bet on the natural gas price. As Amaranth discovered, unlike crude oil, nat-gas futures are highly illiquid. Because of this, when you buy and sell large amounts, it can drastically move the price. Furthermore, in times of shortages like now, the cost can increase exponentially in a short time.
Nat Gas Historical Squeezes
The Nymex natural gas futures long-term chart highlights several parabolic rallies in the last 30 years. And whilst the price increase this year has been dramatic, historically, it’s just a blip. Since 2021, the natural gas price has increased by around 110% and is currently trading at a three-year high of $5.06. However, this pales In comparison to the rally in 2000 when nat-gas exploded 380%, not forgetting the 530% increase between February 2002 and February 2003.
Of course, this is no guarantee that we will see similar something now. However, the signs point to this rally still being in its infancy. If nat-gas futures finish September at this price or above, it will be the highest monthly close in 13 years. If that happens, long-term momentum signals will flash bullish. Furthermore, it will attract new buyers, and shorts will start to feel the pressure. I expect to see capitulation at some stage as consumers bite the bullet and use the futures market to buy what they can’t in the supply-restricted spot market. This could push the natural gas price even higher, forcing producers to unwind hedges and join the buying spree. And on that basis, we could be in for a wild ride over the next few months, and nat gas could soon remind us why it’s the widow maker.
Natural Gas Price Chart (Monthly)
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