HAS NORTH AMERICAN NATURAL GAS VOLATILITY RISEN WITH RISING PRICE LEVELS?

Volatility in natural gas spot prices is driven mainly by fundamentals rather than changes in trading liquidity or speculative trading. This Private Report examines the causes of daily volatility of North American natural gas cash prices, finding that

* The single most important fundamental factor that has caused spot price volatility to rise over time-since 1991-has been an increase in wellhead capacity utilization that has tightened the supply-demand balance.
* Market liquidity and the influence of noncommercial market participants (speculative traders) do not seem to be associated with volatility in either spot or futures markets.
* Volatility does not necessarily increase with price. As prices increase, price movements need to be proportionally larger to produce higher volatility.
* The incremental supply in the form of liquefied natural gas that is expected to enter the North American market later in the decade is likely to dampen volatility by loosening the supply-demand balance.

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