Natural Gas, Review – Short-Term Energy Outlook

Onyx Power and Gas Consulting continues with its weekly series providing the Short-Term Energy Outlook as of December 11, 2018.  This series of news articles should provide a complete insight on the current conditions of the energy…enjoy, check out archives and come back each week for additional information on how all sorts of energy sources impact our daily lives.

Natural Gas

Prices: The front-month natural gas futures contract for delivery at the Henry Hub settled at $4.33/million British thermal units (MMBtu) on December 6, an increase of $1.09/MMBtu from November 1 (Figure 10). Prices rose substantially in the first half of November because of high natural gas demand for heating and power generation. Cold weather across the Lower 48 states in mid-November increased natural gas demand in the residential and commercial sectors. Heating degree days (HDD) reached 14% above normal, the coldest November in the United States in four years. The higher demand contributed to several early-season withdrawals, which kept storage levels low heading into winter and put upward pressure on prices. The deficit of working gas in underground storage widened month-over-month and stands at 0.7 trillion cubic feet (Tcf) lower than the five-year average for the end of November.

Figure 10: Natural gas front-month futures prices and actual minus historical average HDD and CDD

Implied volatility: Concerns about low storage levels with winter weather approaching contributed to an increase in volatility in natural gas futures prices. Natural gas implied volatility averaged 77% in November, much higher than the five-year range and the highest volatility in November in 17 years (Figure 11). In contrast, implied volatility reached the lowest levels ever recorded for the natural gas front-month contract during the summer, but it re-emerged at the end of this year’s injection season when inventories remained lower than historical levels. Throughout November, the increasing storage deficit to the five-year average, along with forecasts of colder temperatures, likely contributed to the increase in implied volatility.

Figure 9:Natural gas implied volatility, monthly averages

Probability: At the beginning of November, the probability of the February 2019 Henry Hub contract expiring at more than $4/MMBtu was 13% (Figure 12). The probability, calculated using futures and options data, of the contract expiring at more than $4/MMBtu increased significantly throughout the month, reaching 52% on December 6. The higher probability was driven by a much higher futures price, which increased by more than $1/MMBtu, and by substantially higher implied volatility, which more than doubled from November 1.

Figure 9:Probability of the February 2019 Henry Hub contract expiring above specified price levels

Futures curve: Natural gas futures prices have increased substantially since November 1 but primarily in the front part of the futures curve (Figure 13). Prices are elevated for the winter months, but as of December 6, the April 2019 contract showed prices falling back below $3/MMBtu. EIA expects that dry natural gas production in April 2019 will be 90 Bcf/d—2 Bcf/d higher than current levels—putting downward pressure on prices as demand declines after the winter.

Figure 9: Natural gas futures curves

The professional consultants at Onyx Power & Gas Consulting are always ahead of the current issues that may affect energy consumption and pricing. Now is the time to partner with an Onyx professional consultant to discuss energy management and secure energy prices based on today’s stable pricing. Volatility in the energy markets makes it too precarious to take chances. Partner with Onyx Power & Gas in Making Energy Make a Difference!

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