Natural Gas Market Volatility: Strategic Entry Points Amid Output Drops and Short Covering

The U.S. natural gas market in 2025 is navigating a complex interplay of record production, surging demand, and episodic volatility. With dry gas output projected to reach 107.1 billion cubic feet per day (bcfd) in 2025-a 3.9% increase from 2024-suppliers are grappling with the dual challenges of oversupply and short-term price swings driven by weather extremes and speculative trading, according to a Forbes analysis. For short-term traders, this environment presents both opportunities and risks, particularly as short covering and seasonal storage dynamics create pockets of momentum.

Production Drops and Market Rebalancing

While 2025 production forecasts are bullish, the market has not been immune to recent disruptions. Between December 2023 and May 2024, U.S. dry gas production plummeted by 5 bcfd, the sharpest decline since the 2020 pandemic, according to a Gorozen blog post. This drop, driven by reduced shale and conventional output, initially spiked prices but was later offset by robust storage injections. By mid-2025, net injections of over 100 billion cubic feet (Bcf) per week for seven consecutive weeks normalized inventory levels, reducing volatility to 69%-a return to historical averages, the Forbes analysis noted.

However, the polar vortex in late February 2025 briefly shattered this stability, with volatility surging to 102% as extreme cold forced record withdrawals from storage, the Forbes analysis reported. Prices spiked to $3.756/MMBtu before correcting downward, highlighting the market's sensitivity to weather-driven demand shocks.

Short Covering and Price Volatility

Short covering has emerged as a key driver of short-term price swings. In October 2025, natural gas futures rebounded sharply as traders rushed to offset short positions after an intraday rally pushed prices near $2.99-the previous Friday's high, according to a Natural Gas Intel article. Similarly, a short-covering rally in August 2025 followed bearish weather forecasts, as speculators scrambled to close losing bets, Natural Gas Intel reported.

These episodes underscore the importance of technical indicators. The Relative Strength Index (RSI) currently hovers near neutral territory, suggesting neither overbought nor oversold conditions, as noted in the Forbes analysis. Traders should monitor support levels at $2.70–$3.00 and resistance at $4.40, with breakouts above $4.40 signaling potential long-term strength.

Historical backtests indicate that when prices touch but fail to break these support levels, the subsequent performance is mixed-showing near-zero returns in the short term but turning significantly negative after 21 trading days, with win rates dropping below 30% beyond 14 days.

Strategic Entry Points and Risk Management

For traders seeking entry points, the current market offers two primary strategies:

1. Bullish Plays on Short Covering:
2. Entry: Buy October 2025 futures near $3.00, targeting a $3.50–$4.00 range if the RSI breaks above 55.
3. Stop-Loss: Place stops below $2.70 to mitigate risks from oversupply or weak LNG demand, per the Forbes analysis.

4. Rationale: Short covering is likely to persist as managed-money accounts remain net short, per the Commitment of Traders report cited by Natural Gas Intel.

5. Bearish Plays on Oversupply:

6. Entry: Sell February 2026 contracts at $3.75, with a target of $2.80 if storage builds exceed 70 Bcf/week.
7. Stop-Loss: Set stops above $4.40 to avoid volatility from cold snaps or LNG export surges, as highlighted in the Forbes analysis.
8. Rationale: Strong storage builds and weak power demand (due to coal switching) suggest a bearish bias into late 2025, the Forbes analysis observed.

Conclusion

The natural gas market's 2025 trajectory is defined by a tug-of-war between record production and episodic volatility. While short covering and weather-driven demand create near-term opportunities, traders must remain vigilant about oversupply risks. By leveraging technical indicators and hedging against storage overhangs, investors can capitalize on this dynamic market without overexposing themselves to its inherent uncertainties.