Image 1: Relative performance of all CME futures products the past three months

Image 1: Relative performance of all CME futures products the past three months
Source: QuikStrike

In fact, over the past three months, the Natural Gas futures market has been on fire. Natural Gas futures have been the best performing futures product, doubling the gains of bitcoin and becoming one of the few markets to move positively in what has been a negative summer for most markets. On the one hand, traders may look at this price action and think to themselves that perhaps we have moved too far too fast. This mindset may point to a mean reversion type of idea. Other traders will note that futures had been down for such an extended period, and sharply from the previous year, that this move is only the beginning of what may transpire.

Image 2: One year chart of natural gas spot prices

Image 2: One year chart of natural gas spot prices
Source: EIA eia.gov/naturalgas/weekly

The chart above comes courtesy of EIA and shows the extent of the negative price action over the course of the last two years. Having peaked at close to $10 / BTU in the summer of 2022 on the back of the massive shortage of global energy supplied, particularly in Europe, prices had fallen to $2 / BTU by the start of 2023 and stayed there for the first half of the year. From this vantage point, the move in spot to about $3 / BTU is a tiny fraction of what could happen going forward, not that the prices we saw in 2022 were anything close to what we normally might expect. However, even before the shortages in Europe, we saw natural gas spit in the $4 to $6 / BTU range, which does suggest there could be remaining upside.

Image 3: Baker Hughes rig count

Image 3: Baker Hughes rig count
Source: EIA, eia.gov/naturalgas/weekly

Image 4: Three-month weather forecast from NOAA

Image 5: Natural Gas futures term structure

Image 6: Seasonality chart for generic front-month Natural Gas futures price

Image 7: Implied volatility term structure for natural gas

Image 8: Natural Gas CVOL and Skew history

Image 9: Matrix of implied volatility by strike across three weekly expirations

Image 10: Broken wing butterfly for weekly LN3X3 using 3.30/3.45/4.00 strikes

Image 11: PNL simulation for the LN3X3 broken wing butterfly