On November 23, the natural gas spot price at the Henry Hub in Louisiana was $4.70 per million British thermal units (MMBtu), the highest price since a temporary spike in January 2018, and before that, the highest price since June 2014. The relatively sudden increase in prices exceeded the expectation of many market participants, based on the prices and volatility of futures and options contracts at the beginning of November. Prices have come down slightly in the past week, but they remain at a higher level than during much of the past four years.

Source: U.S. Energy Information Administration, based on Thomson Reuters
Source: U.S. Energy Information Administration, based on Thomson Reuters
Natural gas is the primary space heating fuel in almost half of all U.S. households, and colder temperatures increase the consumption of natural gas for heating purposes. Data from the National Oceanic and Atmospheric Administration indicate that heating degree days (HDD) in November totaled 14% more than the 10-year (2008–2017) average for November. HDD are a temperature-based proxy for heating demand, and more HDD indicate colder temperatures. In the U.S. Midwest and Northeast, where heating demand is often the greatest, data indicate that HDD for November were 17% to 28% more than the 10-year average, respectively.

As weather-related natural gas demand increased, relatively low levels of natural gas in storage likely contributed to price increases. Natural gas inventories ended October at the lowest level since 2005. On November 23, U.S. inventories of natural gas were less than 3.1 trillion cubic feet, or 19% lower than the previous five-year average.

In November, natural gas prices rose well beyond market expectations in October. With the release of the Short-Term Energy Outlook each month, EIA publishes market-implied confidence intervals for natural gas prices using the value of futures and options contracts. Based on the value of natural gas futures and options contracts for December 2018 delivery traded during the five-day period ending November 1, the implicit 95% confidence interval encompassed prices between $2.63/MMBtu and $3.95/MMBtu. These intervals suggested a less than 2% chance that natural gas futures for December delivery would rise to more than $4/MMBtu. However, on November 28, the contract for December delivery closed at $4.72/MMBtu.

Source: U.S. Energy Information Administration, based on Thomson Reuters, CME Group, and Short-Term Energy Outlook Note: Confidence interval derived from options market information for the five trading days ending Nov 1, 2018. Intervals not calculated for months with sparse trading in near-the-money options contracts.
Source: U.S. Energy Information Administration, based on Thomson Reuters, CME Group, and Short-Term Energy Outlook 
Note: Confidence interval derived from options market information for the five trading days ending Nov 1, 2018. Intervals not calculated for months with sparse trading in near-the-money options contracts.
Although prices have risen recently, EIA expects that growth in U.S. natural gas production will put downward pressure on prices in 2019. EIA forecasts Henry Hub natural gas spot prices to average $2.98/MMBtu in 2019, down slightly from the 2018 expected average of $3.01/MMBtu.

Increases in natural gas prices in spot markets generally do not immediately pass through to residential natural gas prices and expenditures. State utility commissions set the rates that utilities can charge for natural gas deliveries, often a year or more in advance, reflecting the cost of wholesale natural gas that utilities purchased over many months. In addition, residential prices include charges to cover utility operating costs and the cost to transport and distribute natural gas that are not directly linked to spot market prices.

Principal contributor: Tim Hess