Annual price volatility at the Henry Hub has been high for the past decade, but there is no consistent trend of increasing or decreasing volatility, according to the Energy Information Administration (EIA). However, volatility is consistently higher in the New York market than in Chicago or at the Henry Hub.
EIA recently examined volatility in gas markets and recently published its findings. The research relied in part on gas prices published by Intelligence Press in NGI's Daily Gas Price Index.
"An examination of daily settlement prices at the Henry Hub shows that annual volatility has fluctuated between 49% and 218% since 1994," EIA said. Most years annual volatility hovered between 50% and 75%; only in two of the 13 years did it go above 100%. "Although the individual values each year are high relative to some commodities, the level of annual volatility does not seem to exhibit a clear trend in recent years."
Average prices at Henry Hub are increasing, but the upward price movements are not reflected in volatility levels, EIA said, pointing out that price and volatility are "two distinct concepts."
Where EIA did find a clearly discernible trend with regard to volatility is in its seasonality. Volatility follows temperature patterns, with the highest volatility seen from October through February, EIA said. According to EIA's analysis of 1994-2006 gas markets, February had the highest average monthly volatility at 27.45%, followed by December, 26.74%; January, 25.38%; and November, 24.75%. October volatility averaged 22.79%; followed by September, 17.05%; and March 16.49%. August followed close behind at 16.32% while the remaining spring and summer months all had volatilities of less than 13%.
Further, EIA found a "rather complex" relationship between volatility and the amount of gas in storage. "For instance, there appears to be a slight lag between the measured volatility levels and the storage levels in many years such that the relative storage level peaks one or two months after the peak of volatility," EIA said. "This may suggest that volatility affects demand for storage in later time periods or that the impact of storage on volatility has an upper limit beyond which market forces take precedence."
EIA said that while it is common for storage levels above the five-year average to be interpreted as indicating "an ease in market tightness," gas in storage does not impact the market directly. "It is the flows into or out of storage that have a direct impact on the market by altering the current supply or demand conditions."
In its analysis EIA examined volatility at the Henry Hub but also looked at the New York City and Chicago markets and found similarities as well as differences.
At New York City, volatility is significantly higher than at Henry Hub and has been so in recent years, EIA said. Volatility levels at New York have been consistently above 100% since 2000 and around 200% between 2003 and 2005. "Another factor differentiating price patterns at this location from the Henry Hub is that, generally, the level of volatility for a given year seems to follow the same movement as the average spot price in that year," EIA said. This was true except in 2005 when volatility at New York fell from 231% to 191% but the average spot price at New York increased from $6.96 to $10.08/MMBtu.
To explain New York's volatility, EIA pointed to the market's distance from gas supply as well as pipeline constraints, particularly during the winter months; cold winters; high population; and preponderance of gas/fuel oil-fired generation in New York City. EIA did not make mention of the Rockies Express pipeline project, Phase III of which will deliver gas to Ohio, from where at least some of it is expected to reach New York and other eastern markets (see NGI, Aug. 13).
At Chicago EIA found volatility patterns similar to those at Henry Hub. "The lower price volatility in the Chicago market reflects the impact of relatively more supplies being available in the general vicinity," EIA said. "Chicago markets have the advantage of a major trading hub and large-capacity pipeline systems in the area."
While volatility at Chicago is generally greater than at Henry Hub during the winter, volatility at New York often significantly exceeds that at both locations throughout the year.
Even with low volatility levels, price risk can be significant depending upon the market, EIA said.
"[T]he cost impact of price changes in a month with higher volatility (32%), yet a relatively low average spot price ($2.42/MMBtu) [December 2001], was compared with that in a month with lower volatility (19%), but a relatively high spot price ($6.58/MMBtu) [December 2004]. Although the calculated volatility was lower in December 2004, the range of potential costs to the consumer, or revenue for the supplier, was almost double that in December 2001, $2.3 million compared with $1.4 million," EIA said.
"Volatility may not be increasing, but even under relatively low levels of volatility, financial risk can be large as daily price movements expand."
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