The New Economics of Natural Gas

At a Glance

  • Volatility is rising, and there’s more interest than ever in U.S. natural gas

Historically, weather patterns have been the major driver behind price movement in the natural gas market.  But with U.S. natural gas now being exported globally in the form LNG, there is a new variable adding potential volatility to the market.

The Fundamentals

Despite five-year lows on storage and projected 10-year lows after injection season (October 31), existing LNG exports of 4 billion cubic feet/day (and increasing to 7bcf/d in the next few months) and the approaching winter season, volatility in natural gas markets had been at record lows.  From a fundamentals perspective, we see all-time production levels of 79 bcf/d and all-time usage levels that have added to the lowest storage numbers in years.

Now just a few weeks before injection season ends, volatility has returned, reaching the highest levels in the last year.

Henry Hub natural gas futures experienced a drastic run up in price and volatility during the polar vortex in January 2018 and that was with storage levels at 3,126 bcf as of the end of December 2017.  To put this in perspective, that storage level is roughly 19 percent higher than current levels.  At this time last year, we were going into the injection period with roughly 3,311 bcf of storage (20 percent higher).

The Market Response

So what does the market think will happen?  For that, focus on the number of open Henry Hub futures contracts, or open interest.

Since August, CME’s Henry Hub benchmark has hit ten all-time open interest records, reaching its most recent high of nearly 1.7 million contracts on October 4.  Although open interest tends to be overshadowed by trading volume, the market views open interest as the overall health of a commodity futures market.

As the fundamentals in natural gas markets change, the U.S. market has remained the most important in the world for hedgers. Trading volume in Henry Hub futures increased 15 percent in September over the same period in 2017.

Interest in the benchmark U.S. natural gas contract remains high, both from domestic hedgers and international participants who now look to the price as a global pricing benchmark. As volatility returns, open interest will be a number to watch.

Neil Somma is Executive Director of Energy Products at CME Group

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