“Volatile,” a word that is often used to describe the price of natural gas with its random-appearing jumps and plunges, head fakes, and whiplash-inducing turnarounds, no longer describes the price of natural gas. “Chaotic” would be a better term.

Friday last week, when stocks were getting sacked, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010. On Monday, natural gas got smacked back down about halfway, but on Tuesday it rose sharply. And today, when stocks got sacked again, gosh….

February natural gas futures, which expired today, soared a dizzying 13% to $5.687 per MMBtu at the Henry Hub, the highest for front-month futures since January 2010. Much of the move occurred during the last hour of the trading day. It might have been the result of an epic short squeeze, and an act of utter expiration desperation.

March futures jumped 7.4% to $5.305. Natural gas is now in the fairly rare condition of backwardation, when front-month futures are priced higher than forward futures. For example, November futures settled at $4.51 up 2.8%. Backwardation occurs during periods of peak demand, either in cold periods during the winter or a long heat wave during the summer when gas-fired powerplants run at near capacity in large parts of the country. It’s another sign of market desperation

The four reasons for the price pressures that I pointed out a few days ago are still intact [read… From “Glut” To Panic: Natural Gas Soars]:

1. The low price of US natural gas – unique in the developed world – has caused demand to creep up. In 2014, demand will likely be over 20% higher than it was in 2005, the year of the record price spike when natural gas reached $15.40 per MMBtu.

2. The low price – it has been below the cost of production of “dry gas” for years – destroyed the business model for drillers, and they wrote of tens of billions of dollars and curtailed drilling for dry gas. Production is now declining in many fields. Only the prolific Marcellus play, which has finally been connected via pipelines to New York, keeps total US production positive. But even in the Marcellus, drilling fell off, and decline rates of producing wells are as steep as in other plays.

3. Then cold fronts swept across the country. It started in December and continues today: waves of cold weather hit big, populous parts of the nation, going as far south as Texas and Florida. Forecasts are calling for cold weather to continue for a few more weeks. No one trusts them. And traders are now steeped in sorting through arcane weather details, digging for clues. They’re all betting on the weather.

4. And the big money has jumped into the fray. During the years of the glut, much of the big money was lined up on the short side. But it has switched over to the long side, and those who got in early, say, in April 2012 near the decade-low of $1.92 per MMBtu, had a ferocious, vertigo-inducing rollercoaster ride during which the price of natural gas nearly tripled.

Thursday morning – already chaotic given today’s close – the Energy Department’s EIA will publish its market-moving underground storage report. Fasten your seatbelts. Breathtaking moves one way or the other, accompanied by fireworks, are scheduled.

On January 16, I wrote Natural Gas Squeeze? “Panic hasn’t ensued just yet”. And panic still hasn’t ensued just yet. But some whiffs of it are in the air.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.