Volatility of Natural Gas Commodity Prices
Energy is perhaps one of the most important commodity sectors. The path of energy prices has a far-reaching effect on individuals, businesses, nations as well as the state of the global economy. In 2015, the prices of energy commodities moved appreciably lower. The price of crude oil fell by over 30% and the price of natural gas in the United States moved over 19% on a year-on-year basis.
At the end of 2015, the price action in the natural gas futures market became highly volatile. Natural gas is no stranger to such periods of extreme volatility. In August 2012, the price was trading at around $3.13 per million British thermal units. By February 2014, some six months later, the price more than doubled to highs of $6.4930 as frigid weather depleted inventories of natural gas across the United States.
Natural Gas Inventories
In late 2015, just the opposite occurred. A warm start to winter coupled with record-high inventories caused the price of natural gas traded on the New York Mercantile Exchange division of the Chicago Mercantile Exchange to plunge. In December 2015, the price traded to lows of $1.684 per MMBtu, which was the lowest level for the commodity since 1999—a new sixteen-year low.
Since the highs over almost $6.50 in early 2014, the price of natural gas slowly depreciated due to an increase in production and new discoveries of gas in the Marcellus and Utica shale regions of the United States. This led inventories to grow to all-time highs of over 4 trillion cubic feet in November 2015. There was so much gas around that storage capacity became scarce. Meanwhile, the warm start to winter caused demand to decrease. In October 2015, the price traded below $2 per MMBtu for the first time since April 2012. In December, it plunged. The price traded all the way down to $1.684 per MMBtu in the middle of the month. Carnage in the natural gas futures market came at a time when oil prices were also falling to multi-year lows.
Natural gas is a combustible commodity meaning that it has the potential to explode. Those physical characteristics of the energy commodity also somehow seem to translate to its price at times. After natural gas hit those multi-year lows last December, its price became combustible and exploded higher. Over a three week period between December 18, 2015, and January 8, 2016, the price of natural gas rallied by over 48% rising from$1.6840 to $2.4950 per MMBtu. Daily historical volatility rose from around the 30% level to over 75%.
Following the spectacular rally, the price of natural gas retreated and was trading around $1.97 on February 12 below the midpoint of the high to low range between December 2015 and January 2016. Fundamental and technical factors took the price lower once again.
Volatility in the Winter
Natural gas always tends to be most volatile during winter months. That is because of weather, demand for heating rises as the temperatures across the United States fall. As the winter of 2016 slowly starts to change to spring, the withdrawals from inventories of natural gas will shift to injections sometime in April as warm winds decrease the demand for heat powered by natural gas in populous regions of the U.S.
Natural gas has always been a wildly volatile commodity since the inception of trading on the NYMEX in 1990. Over the life of trading in natural gas futures, the price range has been lows of $1.02 in January 1992 to highs of $15.65 per MMBtu in October 2005 following the devastating effects of Hurricane Katrina on the Gulf Coast of the United States and natural gas infrastructure in Louisiana. The delivery point for the most liquid natural gas futures contract in the United States, the NYMEX contract, is at Erath, Louisiana.
While natural gas remains just below $2 per MMBtu, the lower end of its trading range since the inception of the futures market, the potential for volatility in this energy commodity is always high. The price action in December 2015 and January 2016 is a testament to the wild nature of this bucking bronco of a commodity.