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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?

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    $\begingroup$ You might want to read the famous article "Orange Juice and the Weather" (1984) for a pessimistic view of how little commodity price movements are related to the weather. It is a factor, but a very small factor. $\endgroup$ – noob2 Feb 2 '20 at 16:32
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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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