2 Min readArticle06 Mar 2024

What’s the Warm Winter Doing to Natural Gas Prices?

At a Glance

Between January and February, natural gas prices declined by $1.732 per thousand cubic feet amidst decreased demand in the U.S. and Europe

Average daily volume in Natural Gas futures and options spiked to all time highs, with the CVOL Index indicating an equal bias around potential price increases or decreases

Perhaps no other commodity, especially in the energy sector, has been as volatile as natural gas since the beginning of the year.

While Henry Hub Natural Gas futures prices did not have a 2-to-1 split, its value declined from a high of $3.313 per thousand cubic feet on January 12 to a low of $1.581 per thousand cubic feet on February 15. Seasonally warm weather, along with global unrest, have contributed to one of the quickest declines on record, with prices sinking to their lowest levels in nearly three decades.

Supply and Demand

The age-old principle of supply and demand has been hard at work over the last few months. One of the warmest winters on record in the United States has created a natural gas glut. An extremely mild winter has caused demand for natural gas for electricity and space heating to plummet. At the same time, inventories have climbed to much higher than normal levels.

This demand destruction is also present outside of the U.S. In the two years since Russia launched its invasion of Ukraine, European demand for natural gas has dropped by 20% – the lowest it’s been in a decade, according to the Institute for Energy Economics and Financial Analysis.

Rising Volatility and Volume

As prices have dropped, volatility and volume in futures and options have risen. In 2023, CME Group reached a record annual average daily volume (ADV) of Natural Gas options of over 150,000 contracts. Natural Gas futures ADV also increased 42% to 495,000 contracts in December. In 2024, volume growth continues to be significant. Average daily trading volume (ADV) for January Natural Gas futures and options spiked to a record 300,000 contracts and further increased to 400,000 ADV in February.

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.

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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