U.S. natural gas futures volatility – both implied and historic – was on track to hit record highs in 2022 as elevated global prices feed demand for U.S. exports amid supply disruptions and sanctions linked to Russia’s war in Ukraine.
Volatility has risen this year on the shutdown of Freeport LNG’s liquefied natural gas (LNG) export plant in Texas after an explosion in June and several delays to its planned restart – from October to November to December to the end of the year.
Uncertainty over Freeport will likely continue into next year as many analysts do not expect the plant to return until the first quarter of 2023.
U.S. gas futures rise and fall on every new piece of news about Freeport because gas demand will soar once the plant returns. Freeport can turn about 2.1 billion cubic feet per day of gas – about 2% of U.S. daily production – into LNG.
At-the-money 30-day implied volatility, a determinant of an option’s premium, was on track to average 79.9% in 2022.
That would top the annual record of 68.6% in 2009 and compares with 53.6% in 2021 and a five-year (2017-2021) average of 44.5%.
On a daily basis, implied volatility hit a record high of 132.6% in November 2022 and a record low of 18.6% in April 2019.
The market uses implied volatility to estimate likely price changes in the future. A liquid and volatile market like U.S. gas gives investors lots of opportunities to make (and lose) money quickly.
Historic or actual 30-day close-to-close volatility, meanwhile, was on track to average 92.6% in 2022.
That would top the current annual record of 75.0% in 1996 and compares with 50.7% in 2021 and a five-year (2017-2021) average of 47.2%.
On a daily basis, historic volatility hit a record high of 177.7% in February 2022 and a record low of 7.3% in June 1991.