When Arctic Storm Meets Government ShutdownNYMEX: Micro Henry Hub Natural Gas Futures ( NYMEX:MNG1! )
A “Perfect Storm” is brewing by weather catastrophe and man-made events.
On Thursday, November 6th, forecaster Atmospheric G2 said that it predicted colder than normal weather over the Eastern US for November 11-15. Driven by the expectations that record low temperatures will boost heating demand for natural gas, NYMEX Henry Hub natural gas futures ( AMEX:NG ) moved sharply higher.
The lead December contract (NGZ5) hit a daily high of $4.42 per MMBtu, up 18 cents (+5%) from the prior day. The contract settled at $4.357, up 12.5 cents or +2.95%. Total daily volume for all NG contract months reached 590,250 lots, an increase of 118,770 from the prior day. Total Open Interest was 1,556,062 contracts.
Then, just a day later, Atmospheric G2 put out another forecast. It said that warmer-than-normal temperatures are expected in the western two-thirds of the US for November 12-16 and are expected to remain above-normal for November 17-21. NGZ5 closed at $4.315 on Friday, down 0.96%. Another bearish factor came from Baker Hughes, which reported a 2.25-year high in the number of active US natural gas rigs.
On Sunday night, as the early winter blast begins to hit the ground, natural gas futures market opens for the week up 3.3% at $4.447. NGZ5 pulled back on Monday and is currently trading at $4.375. Shall we say, “Buy the rumor, Sell the fact”?
The news of a massive arctic storm moving the market is nothing new. During the past winter, on December 29, 2024, the Weather Co. and Atmospheric G2 released a weather forecast showing colder temperature in the East. When the futures market opened the next day, Henry Hub futures prices surged 20%, hitting a new 52-week high of $4.20. My write-up on January 6, 2025, explored how to trade the weather.
The Polar Vortex is expected to bring record amount of snow in the Great Lakes. Chicago and South Bend could see up to 12 inches of snow within 24 hours, due to the infamous “Lake Effect”. Florida and the Panhandle area could see temperature dropping from the 60s (Fahrenheit) to the mid-20s by Tuesday.
What stands out about this winter blast is its timing, happening very early in the season. Comparing to last winter, the first major snowstorm came in mid-January.
The winter storm threatens to bring air travel to a standstill. The impact will compound as the 40-day-long US government shutdown already reduced air flight capacity by 10%, causing massive cancellations and delays.
In the latest news, the US Senate may have reached a deal to end the government shutdown. Hopefully, it will happen in time ahead of Thanksgiving, the busiest travel season in the U.S.
The ideal instrument Trading the Weather
Natural gas is a leading energy source. The U.S. Energy Information Administration (EIA) estimates U.S. electricity production at 4.18 trillion kilowatt-hours in 2023.
• About 43.1% of the electricity was generated by natural gas.
• Nuclear power contributed to 18.6%, while coal had a 16.2% share.
• Renewables accounted for a 21.4% share, including 10.2% from Wind, 5.7% from Hydro, and 3.9% from Solar.
Electricity is hard to store, while its demand is highly unpredictable. Unforeseen changes in power demand could send shock waves into the market. In winter months, weather conditions have the biggest impact in natural gas demand.
In addition to power generation, the biggest natural gas usage is for heating homes, factories and commercial offices. According to the EIA data, 48% of US households use natural gas for space heating, water heating and cooking.
The heating consumption varies by season and by region, while the biggest contributing factor is temperature. As long-range weather forecasts are extremely difficult, natural gas prices are highly reactive to news of upcoming winter storms.
Heating Degree Day (HDD) is the number of days in a month where the average daily temperature is below 68 degrees Fahrenheit. Energy traders deploy HDD analysis and weather forecast models to predict temperature trends, electricity demand and subsequent natural gas use.
Trading with Micro Henry Hub Futures
Micro Henry Hub natural gas futures (MNG) offer smaller-sized versions of CME Group’s liquid benchmark Henry Hub futures (NG) contracts. The Micro futures have a contract size of 1,000 MMBtu, which is 1/10th of the standard contract.
The Micro contracts allow traders to control a large contract value with a small amount of capital to take advantage of significant margin offsets.
With Monday evening quote of 4.375, each December 2025 contract (MNGZ5) has a notional value of $4,375. Buying or selling one contract requires an initial margin of $367. The next lead contract, January 2026 (MNGF6), is currently quoting at 4.601, for a notional value of $4,601. The initial margin is $354.
Since hitting the 52-week low of $3.62, MNGZ5 has gone up 20%. Meanwhile, MNGF6 is down 25% from its 52-week high reached in March 2025.
As we have seen in the past, unpredictable weather events could send large shocks to natural gas prices. We have recognized the pattern of weather forecasts driving futures prices up, and then the prices trending back down in the midst of the storm. In my opinion, if we see another major winter storm coming in December, MNGF6 has the potential to move much higher.
With Micro Henry Hub contracts, traders could potentially realize sizable gains with a small capital requirement. For MNGF6, traders enjoy a built-in leverage of 13:1 (= 4601/354).
Hypothetically, if MNGF6 moves up 5% to $4.831 with lower temperature forecasts, the 0.23 price gain would translate into $230 for a long futures position, given the contract size at 1,000 MMBtu. Using the initial margin of $354 as a cost base, the trade would produce a theoretical return of 65.0% (=230/354).
The long futures position would lose money if natural gas prices moved lower. Traders could set up a stop loss to hedge the downside risk when entering the long futures order.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
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