Natural Gas

Prices: The front-month natural gas futures contract for delivery at the Henry Hub settled at $3.24/million British thermal units (MMBtu) on November 1, 2018, an increase of 14 cents/MMBtu from October 1 (Figure 8). Several factors have contributed to higher Henry Hub prices. Warmer-than-normal temperatures persisted into early October, helping to maintain high power demand for natural gas in some parts of the country, while an early round of colder temperatures in other parts of the country resulted in increased residential and commercial heating demand. In addition, nuclear outages further contributed to demand for natural gas in power generation. The higher demand helped to keep storage levels low heading into winter, which put upward pressure on prices. Working gas in underground storage remained 638 billion cubic feet (Bcf) (16.9%) lower than the five-year (2013–17) average for the week ending October 26 and 623 Bcf (16.5%) lower than last year at this time.

Implied volatility: Concerns about low storage levels as winter approaches contributed to an increase in volatility in natural gas futures. Natural gas implied volatility averaged 38.7% in October, near the five-year average (Figure 9). In February 2018, implied volatility fell lower than the five-year range, and, during the summer, it reached the lowest levels ever recorded for the natural gas front-month contract. Record natural gas production growth and production levels helped to reduce concerns about supply availability and kept prices in a narrow trading range. Record natural gas demand for power generation and increased exports, however, countered some of the production growth and prevented inventories from reducing the storage deficit from last winter. Volatility re-emerged as the end of the injection period approached with inventories still lower than historical levels.