Using Weather Data in Natural Gas Price Forecasts

Summary

The document considers how to incorporate temperature forecasts into a natural gas fair-value model, including which regions’ weather matters and whether regional temperatures should be averaged. The response describes a relationship between temperature and gas demand, while emphasizing that weather is only one influence on price. Over longer horizons, temperature helps shape the seasonal pattern in gas prices, though that pattern may be theoretical rather than directly tradable.

For shorter and medium-term forecasts, prices also reflect supply and demand conditions. Geopolitics, liquefied natural gas supply, and foreign exchange rates are among the other factors named as influences. The response does not identify the most influential US cities or prescribe a regional weighting or averaging method. It offers a qualitative framework, not a fitted model or evidence that a particular weather aggregation improves forecasts.

Key ideas

• Temperature can affect natural gas demand, with the relationship depending on location and temperature range.
• Weather helps shape the seasonal pattern in gas prices over longer horizons, but that pattern may not be directly tradable.
• Shorter-term prices also respond to supply and demand factors such as geopolitics, LNG supply, and exchange rates.
• The document does not specify which US regions to use or how to aggregate their temperatures.

Tags

# Predicting natural gas prices using weather data


# Predicting natural gas prices using weather data












I developed a model for predicting temperatures and I am planning to add this to a natural gas fair value model together with other parameters.

My question is:

- is the natural gas future price mostly related to US weather evolution or other countries/areas?

- Moreover, which US areas/cities are those influencing prices the most? Is an average of temperatures from different areas appropriate to forecast gas prices?

## Answer by Juan Ignacio Gil (score 3)

https://quant.stackexchange.com/a/51010

Natural gas prices and temperature are correlated, but there are other factors here:

- In the long term, the intrayear shape of gas prices is a function of temperature, but that curve is usually non tradable, so it's just theoretical at most.

- In the medium/short term, gas prices (as any other prices) are a function of supply and demand. Demand is often very correlated with temperature (depending on the country and the temperature range), but other factors (geopolitics, lng supply, fx rates, etc) can affect both supply and demand.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.