Is Seasonality in Natural Gas Prices Important?

November 2013

• With natural gas consumption being closely associated with heating demand, it seems intuitive that demand for the commodity and the price would rise in winter relative to other seasons.
• However, historical data show we can’t always trust our intuition, and so buying gas at a fixed price for delivery in the winter to avoid a price increase and buying at a floating price in the summer when demand is weaker can be costly.
• It is difficult to ascribe a seasonal trend since prices also reflect conditions that are independent of weather, including infrastructure or new technological development and changes in government policy.

With natural gas consumption being closely associated with heating demand, it seems intuitive that demand for the commodity and the price would rise in winter relative to other seasons. On that rationale, one could look to exploit this logic by agreeing to buy gas at a fixed price for delivery in the winter (November to March) to avoid a price increase and to buy at a floating price for delivery in the summer (April to October) when demand is weaker.

However, historical price data show we can’t always trust our intuition

For the 11 gas years presented in this graph, the average price for spot delivery from November to March was $5.49/GJ, while the average price for spot delivery from April to October was $5.02/GJ. So average spot prices were about 9% higher in winter. On the other hand, since November 2009 prices have traded in a narrower range than previously. Furthermore, it can be seen that in some gas years spot prices were on average higher in summer than in winter. The minimum spot prices in a gas year are indicated by green circles while the maximum spot prices are indicated by red circles.

In four of the eleven years (2003-04, 2004-05, 2007-08 and 2011-12), the average winter price was lower than the average summer price.

The price movement between November 2011 and October 2012 is notable in that the spot price fell throughout the winter and reached its minimum at the start of spring. Thereafter, the price rose and set its maximum for the gas year in late October.

In all of these periods, it would have been costly to buyers who had fixed their delivery prices at levels higher than the average for the winter and/or paid floating prices in the summer only to see those prices rise to levels higher than in the winter.

Adopting a strategy based on seasonality to acquire gas forward (e.g. one year before the gas is to be delivered) is also debatable.

The graph above shows the price activity for the contracts making up the following gas year (e.g. the price between November 2002 and October 2003 is for gas to be delivered daily at one fixed price from November 2003 to October 2004). The chart shows that the minimum and maximum prices do not follow a seasonal pattern. For example, the best time to lock in a fixed price for the 2003-04 gas year was in November 2002, 11 months ahead. On the other hand, the minimum price to lock in a fixed value for the 2006-07 gas year occurred in September 2006. Neither of these is a summer month.

While unexpected changes in weather can strongly affect natural gas prices, it is difficult to ascribe a seasonal trend since prices also reflect conditions that are independent of weather, including infrastructure or new technological development and changes in government policy relevant to the industry.

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