Natural Gas Outlook: Prices Touch 4-Month Low

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The Henry Hub spot price averaged $4.29 per MMBtu in March, $1.03 per MMBtu lower than the average spot price in February and $0.64 per MMBtu lower than the forecast for March in last month's Outlook. In the same way that colder-than-normal weather contributed to higher prices in January and February, warmer-than-normal weather contributed to lower prices in March. In particular, prices touched a 4-month low during the final days of the month as lower demand and higher production resulted in storage injections. EIA expects prices to remain low for the next several months. With strong production and the absence of meaningful space-heating demand, lower-priced natural gas will once again compete with coal for a share of the baseload electricity supply—particularly in the spring and fall. Sustained low prices could reduce drilling activity over time. As a result, EIA expects production to decline and prices to increase in 2011. The Henry Hub spot price forecast averages $4.44 per MMBtu in 2010 and $5.33 per MMBtu in 2011.

Volatility in the June 2010 futures and options markets trended lower during the first half of March but rose in the second half as natural gas spot prices fell to $4 per MMBtu. For the 5-day period ended April 1, implied volatility for June 2010 natural gas options averaged 41 percent per annum, while June 2010 futures prices averaged $4.04 per MMBtu. The lower and upper limits of the 95-percent confidence interval, therefore, were $3.00 and $5.50 per MMBtu, respectively.

A year earlier, natural gas delivered to the Henry Hub in June 2009 was trading at $3.90 per MMBtu and implied volatility averaged about 63 percent. This generated a lower and upper limit for the 95-percent confidence interval of $2.45 and $6.20 per MMBtu, respectively.

Despite the increase in the implied volatilities during March, the probability of the Henry Hub realized price rising above $6.50 million Btu in December 2010 fell from 30 percent last month to 19 percent this month.





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