Natural Gas and the Approaching Winter Season Mean Volatility

Natural Gas and the Approaching Winter Season Mean Volatility
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Natural gas can be one of the most volatile commodities of that trade in the futures market. Since the start of trading back in 1990, the price of the energy commodity has ranged from a low of $1.02 to $15.65 per MMBtu. Over recent years, the price range of natural narrowed as the supply and demand side of the market have grown. When it comes to supplies, massive discoveries of natural gas in the Marcellus and Utica shale regions of the United States have resulted in the addition of quadrillions of cubic feet to the commodity to reserves. At the same time, technological advances in hydraulic fracking and fewer regulations have lowered the cost of production while increasing supplies exponentially.

With the increase in supplies, new uses for the commodity have balanced the market. The replacement of coal with natural gas in power or electricity generation has become a growing demand vertical for the natural gas market. At the same time, technology has made it possible to liquefy natural gas for exportation by ocean vessel to areas of the world where the price is higher. Increasing liquidity in a commodities market tends to lower price variance. 

Source: CQG

As the monthly chart highlights, since the start of 2016, the price of natural gas traded from lows of $1.611 to highs of $3.994 per MMBtu. The last time natural gas moved to a significantly higher level was during the cold winter season of 2014 when stockpiles fell below the one trillion cubic feet level. In February of that year, the price reached a peak of $6.493 per MMBtu. Increased production, rising stockpiles, and temperate weather conditions led to lower prices. Going into the peak season of demand in 2015 and 2016, inventories rose to over four trillion cubic feet for two consecutive years which were record levels.

During the peak season in 2017/2018, the price only made to a high of $3.661 per MMBtu as stockpiles peaked at 3.79 MMBtu. Injections into inventories in preparation for the 2018/2019 winter have been running significantly lower than in previous years as there are only around two months to go until injections turn to withdrawals from stockpiles across the United States. As of September 21, the total amount of natural gas stocks stood at 2.768 trillion cubic feet which were 20 percent below the level at the same time the prior year and 18.3 percent below the five-year average according to the Energy Information Administration. The lowest level of inventories in many years could mean that the price of natural gas is preparing to enter a highly volatile period if the cold winds of the winter season increase demand to a level where stockpiles become insufficient.

The last time that the price of natural gas moved to the upside as a result of a cold winter and low inventory levels was in 2013, which took the price to around the $6.50 per MMBtu level in the early months of 2014. At this time of the year in 2013, total inventories stood at 3.385 trillion cubic feet, which was 617 billion cubic feet above the current level of stocks.

With fewer than two months to go before stocks begin to decline, the level of natural gas is at a historically low level which could lead to increased price variance in the energy commodity during the winter season of 2018/2019. Price volatility creates plenty of trading opportunities, and the weather will determine if the coming winter months will be the most volatile peak season in the natural gas market since 2014.

 

 

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