MW Natural-gas prices doubled in the last 5 trading sessions. Here are signs a 'sharp collapse' may soon unfold.
By Myra P. Saefong
Why 'backwardation' in futures prices is important right now in the natural-gas market
Natural gas for February delivery topped $7 per million British thermal units in intraday trading on Monday - the first time a front-month contract has hit that level since December 2022.
Frigid weather throughout much of the U.S. has led to prices for natural gas roughly doubling in just five trading sessions.
Yet there are some signs on Wall Street that the value of the heating fuel may face a "sharp collapse" in the days or weeks to come.
Natural gas has rallied on the back of supply concerns, driven by a winter storm that's blanketed a large part of the U.S. Those inventory worries, however, don't extend much past the near-term price, based on the commodity's contracts for future delivery - which now all point to the potential for a significant fall in prices ahead.
Read: Why this airline stock is hurt the most as winter storm disrupts flying for thousands
While consumers' heating bills tend to reflect natural-gas usage at a certain price charged by utility providers - which hedge prices to reduce their financial risk from volatile energy markets - futures contracts help establish the value for the commodity in the months ahead.
With the February natural-gas futures contract expiring at the end of Wednesday's trading session, it will be "critical" to watch the price of the March contract, which is trading at a roughly $2.50 discount to the February contract, said Tyler Richey, co-editor at Sevens Report Research.
That leaves the "futures duration curve in a steep backwardation dynamic" - meaning the current price is higher than prices for contracts for delivery further out in the future, Richey told MarketWatch.
Prices for the front-month February natural-gas contract (NGG26) climbed by 29% to settle at $6.80 per million British thermal units Monday, the highest finish for a front month since Dec. 15, 2022, according to Dow Jones Market Data. Those prices have more than doubled over the last five trading sessions.
Prices for the March natural-gas contract (NGH26), however, were up by 8% to settle at just $3.90 Monday.
Another factor impacting futures prices is liquidity, or how easily a contract can be bought or sold without triggering major changes in a commodity's price. Right now, liquidity is "extremely thin" in the February contract, which is trading significantly higher than the next contract month of March, noted Rebecca Babin, a senior energy trader and managing director at CIBC Private Wealth. That shows that there are some technical forces at play, she said.
The concentration on the front-month contract is "typical for a weather-sensitive commodity, especially when liquidity is limited," Babin said. "Looking farther out ... prices are far more moderate and reflect a normalization of prices - still higher than they were a week ago, but not to the scale of the front month."
The higher near-term prices and lower prices for contracts for delivery in the months ahead also suggest the rally in the February futures contract is based on near-term supply concerns, and "not any longer-term structural market worries of a prolonged supply shortage," said Sevens Report's Richey.
Read: Natural-gas prices see 'historic' surge as U.S. braces for winter storm. What that means for heating bills.
At the same time, weather models are forecasting more moderate temperatures in the coming weeks, which should theoretically see the rally in natural-gas prices "subside, assuming there is no lasting damage impacting domestic natural-gas production [and] logistics," said Richey.
"That could set futures prices up for a sharp collapse in the sessions ahead," he added.
Furthermore, a report from SentimenTrader on Monday pointed out that the Optix sentiment indicator for the United States Natural Gas Fund UNG has topped 95% as gas prices have surged, triggering a "reversal signal."
The Optix sentiment indicator for the United States Natural Gas Fund triggered a reversal signal after spiking above 95%.
The UNG Optix indicator hitting 95% has historically been a "reliable precursor to significant price declines, as the 'fear premium' embedded in the price tends to evaporate quickly once the immediate weather threat passes," the SentimenTrader note said.
That suggests the "path of least resistance for natural-gas prices is lower," it added.
An "inverse" exchange-traded fund, such as ProShares UltraShort Bloomberg Natural Gas KOLD, provides an opportunity for significant gains if gas prices do retreat, as it seeks to track twice the inverse daily performance of natural-gas futures, according to SentimenTrader.
The ETF can be used for short-term trading to profit from declines in natural-gas prices. But SentimenTrader warned that it may be a case of "catching a falling knife," given that investing in it involves extreme volatility and risk, and that the weather forecast is its "lifeline."
-Myra P. Saefong
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 26, 2026 15:15 ET (20:15 GMT)
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