What’s the Warm Winter Doing to Natural Gas Prices?
By Scott Bauer
nat gas vol OI

Has the U.S. Natural Gas Market Found a Floor?

After spiraling downward for months, natural gas had its biggest single-day gain in more than 18 months in late February. This came after one of the largest domestic producers, Chesapeake Energy Corp., said it was cutting its production by 30% in response to recent price drops. However, that rally lasted a mere 48 hours as withdrawals from underground gas storage have been lower than usual, leaving stocks at much higher than average levels for this time of year.

Natural Gas Risk Management

According to the CME Group Natural Gas CVOL volatility index (NGVL), the call skew – or difference in implied volatility between puts and calls – has flattened considerably since early January when upside call options were priced much more expensively than downside put options. With natural gas prices at multi-decade lows, the option paper is suggesting that participants have an equal bias whether prices are going up or down.

Nat Gas cvol

The liquidity of Henry Hub Natural Gas futures and options at CME Group allows participants to quickly enter and exit positions with the third largest physical commodity futures contract in the world by volume. As the impact of warmer weather on natural gas supply and demand continues to unfold, there may be opportunities to leverage the Natural Gas futures product suite to take advantage of both direction and volatility.

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About the author

Scott Bauer
Scott Bauer, CEO, Prosper Trading Company

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

 

 

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