Talking Points:
- The increase suggests the exchange expects further volatility in the natural gas market
- Margin requirement bumped to $4,700 from $3,700
- Inventory concerns due to anticipated cold weather are a contributor to the price increase
The Chicago Mercantile Exchange (CME) announced Monday it will raise the margin requirement for natural gas futures. While crude prices have declined 17% since October 1st, natural gas futures have ballooned 41% in the same span. The bump saw natural gas trade at its highest level since February 2014, just shy of $5 per contract.
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Unsurprisingly, average true range (ATR) and volume have also seen notable increases. On November 13th volume ticked up to its highest level since February 2018 which preceded the price pop to the $4.680 range.
Natural Gas Futures (NG1!) Price Chart 240 Minute, September 2018 to November 2018 (Chart 1)
Causation behind the volatility is debated but many speculators have expressed inventory concerns ahead of an anticipated cold winter. Early last week saw many eastern parts of the United States get their first serious snowfall which could have stoked concern. While natural gas inventory rose last week according to the Energy Information Administration (EIA), the 3.247 trillion cubic feet in inventory is 14% below last year’s level and 15.6% below the 5-year average for mid-November.
The increased margin requirement given the volatility is unsurprising but could sideline some smaller retail traders. However, it is unlikely to materially impact the largest participants in the natural gas market especially if concerns over an especially frigid winter ring true.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
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