Why UNG May be an Asymmetric Opportunity into 2025
4min read U.S. natural gas prices climbed 2.5 percent this week following a larger-than-expected inventory draw, reflecting shifting market dynamics amid record consumption. The Energy Information Administration reported a 190 billion cubic feet drawdown in weekly inventories, significantly surpassing the seasonal average of 66 billion cubic feet.
While natural gas storage levels remain well above their five-year average, this metric alone no longer captures the full picture of the market.
Growing liquefied natural gas exports and increased domestic power generation demand, as natural gas replaces coal, have driven U.S. consumption to record levels.
These factors highlight the importance of assessing inventory relative to demand, rather than absolute storage levels. By this measure, current inventories are 5 percent below average, indicating tighter market conditions than storage data alone suggests.
In other words, the Nat Gas market is tighter than it appears as demand picks up and supply is slow to react following a long period of bearish action in the Nat Gas marketplace.
Short-term weather forecasts remain a key factor in the immediate direction of natural gas prices. Improved weather conditions and expectations for a mild Christmas season, aside from cooler temperatures in the southeastern U.S., could temper near-term price gains. Additionally, robust shale production has increased the supply of natural gas, creating a buffer against short-term demand spikes.
However, the broader market outlook points to firming natural gas prices in the longer term. With sustained demand growth from both domestic and export markets, coupled with increasing reliance on natural gas for power generation, prices are expected to stabilize above the $3 per million British thermal units mark.
This evolving dynamic underscores the shifting fundamentals of the natural gas market. While seasonal factors like weather patterns and short-term production trends will continue to drive price volatility, structural demand growth and the transition to cleaner energy sources provide a solid foundation for long-term price support. Investors should monitor inventory trends relative to consumption and the pace of LNG export growth as key indicators for future market conditions.
Natural gas prices are navigating a complex landscape of strong demand, ample supply, and short-term weather-driven variability. The recent price jump highlights the market's sensitivity to unexpected developments, but the underlying fundamentals suggest a more stable pricing environment in the years ahead.
Natural Gas Market Outlook for 2025: Steady Growth Amid Global Demand Dynamics
The natural gas market in 2025 is poised for moderate growth, shaped by rising domestic production, expanding export capabilities, and fluctuating global demand. Projections from the Energy Information Administration (EIA) and insights from industry experts provide a nuanced picture of the sector's trajectory.
Price Forecast. The EIA anticipates that the Henry Hub spot price will average $2.95 per million British thermal units in 2025, marking an increase from the $2.54 average seen in 2023. This pricing reflects a balancing act between growing supply and resilient domestic and international demand. However, global pressures, particularly from Asian markets, could lead to price volatility as power firms in the region grapple with coal production and energy policy decisions.
Production Outlook. Natural gas production in the United States is expected to grow by 1 percent in 2025. The Permian, Eagle Ford, and Haynesville basins are key contributors to this increase, supported by technological advancements and continued investments in shale gas extraction. This uptick underscores the industry's adaptability to market signals and infrastructure developments.
LNG Export Expansion. Liquefied natural gas exports are projected to rise significantly, increasing by 15 percent to nearly 14 billion cubic feet per day in 2025. This expansion underscores the pivotal role of U.S. LNG in meeting global energy needs, particularly in Europe and Asia, where natural gas is seen as a critical bridge fuel during the transition to renewable energy sources.
Storage Levels. Natural gas inventories are forecast to reach 1,920 billion cubic feet by the end of March 2025, 2 percent above the five-year average. This storage level suggests a stable supply-demand equilibrium, providing a buffer against seasonal fluctuations and potential supply chain disruptions.
Residential Pricing Trends. Inflation-adjusted residential natural gas prices are expected to decline to $12.00 per thousand cubic feet, a 22 percent drop from 2023 levels. This reduction could provide relief to consumers, particularly in regions heavily reliant on natural gas for heating and electricity.
Global Demand and Competitive Pressures. While domestic projections indicate steady growth, the international landscape presents complexities. Reuters highlights that global natural gas prices may continue to rise into 2025 as Asian power producers ramp up coal output, potentially slowing the pace of natural gas adoption. This dynamic illustrates the challenges of aligning energy policies with market realities and environmental commitments.
Moreover, the 2025 outlook for natural gas is characterized by cautious optimism. Increased production and export capacity position the U.S. as a key player in global energy markets, while stable pricing and inventory levels provide a solid foundation for domestic consumers. However, international market dynamics, particularly in Asia, will play a critical role in shaping global demand and pricing trends. Investors and industry stakeholders should remain vigilant, balancing domestic growth opportunities with the challenges posed by evolving global energy policies and market conditions.
UNG Outperforms NG during Backwardation
Another very important factor right now – and one that is extremely instrument specific for UNG – is the forward curve in the Natural Gas futures market.
A forward curve in a commodity futures market is a graphical representation of the prices of futures contracts for a specific commodity across different maturities. It shows how the market values the commodity at various future dates, indicating whether the market is in contango (future prices higher than spot prices) or backwardation (future prices lower than spot prices).
The curve reflects market expectations about supply, demand, storage costs, and other factors affecting the commodity's price over time. The current Nat Gas futures forward curve is shown below.
Note that we are now in backwardation, and the outlook suggests this will last into next February or March. It may last much longer if demand continues to dominate the marketplace.
The key point to appreciate here is that UNG – the ETF – is GUARANTEED to outperform the spot Nat Gas market during periods of backwardation. Here's how it works"
UNG is essentially a trader that sells expiring contract exposure and replaces it by buying new contracts up the curve. In backwardation, the price of future contracts is lower than the price of the current expiring contract. Hence, the act of selling the expiring contract and buying new contracts up the curve is an act of selling high and buying low.
It's as simple as that. And right now, as we close out 2024 and work our way toward the spring in 2025, UNG is poised to outperform the spot Nat Gas market during a period where our research shows that market is a fair bit tighter than most market participants may understand at present.
