US natural gas’s implied volatility

Natural gas’s (UNG) (BOIL) (FCG) (GASL) implied volatility was 35.6% on April 7, 2017—1.6% above its 15-day average.

Where Natural Gas Prices Could Settle This Week

As you can see in the above graph, natural gas’s price and implied volatility were broadly inversely related. When prices rose steadily, implied volatility tended to fall. On the other hand, sharp falls in prices led to spikes in implied volatility. However, between December 2016 and February 2017, natural gas prices fell steadily. The slow and steady nature of the fall caused implied volatility to fall.

Natural gas’s implied volatility rose to 56.2% on November 14, 2016. Since then, it has fallen 36.6%, while natural gas prices have risen 18.6%. Last week, natural gas May futures rose 2.2%. Natural gas’s implied volatility rose 2.9% during the week. The rise in prices, even as natural gas demand goes into a lull with the onset of spring, caused the rise in natural gas’s implied volatility.

Energy ETFs

The above analysis could be important for natural gas–tracking ETFs such as the ProShares Ultra Bloomberg Natural Gas (BOIL), the Direxion Daily Natural Gas Related Bear 3X ETF (GASX), the United States Natural Gas ETF (UNG), and the Direxion Daily Natural Gas Related Bull 3X ETF (GASL).

Natural gas price forecast

On the basis of a normally distributed bell curve, applying a standard deviation of 1.0 and an implied volatility of 35.6%, natural gas May futures could close between $3.10 and $3.42 per MMBtu (million British thermal units) in the next seven days. The probability of natural gas prices closing in this price range over the next week is 68.0%. On April 7, 2017, natural gas May futures closed at $3.26 per MMBtu.

So, while natural gas will likely hold the crucial level of $3.2 this week, the $3.40 level looks possible. Fundamental data could be the key factor.

Keep an eye on Market Realist’s natural gas coverage on Thursdays.

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