Seasonality and spikes in the natural gas market

In this paper we propose and examine an arbitrage-free model for the natural gas spot price and its convenience yield. Performing an empirical analysis of the European natural gas spot and futures markets, we observe that log spot prices are non-stationary, exhibit mild seasonality, and display almost continuous behaviour. In contrast, the implied convenience yield is stationary, shows strong seasonality, and experiences frequent spikes. Motivated by this evidence, we model the spot convenience yield as a combination of a deterministic seasonal component and a mean-reverting stochastic process with jumps. By assuming an appropriate distribution for the jump component, we derive a closed-form expression for futures prices. Our model demonstrates an excellent fit to European data, both before and after the COVID-19 pandemic and the Russia–Ukraine war.