What a difference a few months can make. Back in June 2022, the Energy Information Administration (EIA) forecasted that natural gas prices (as measured at the Henry Hub located in Erath, Louisiana) would remain above $8.00 per MCF through the winter.

Henry Hub natural gas price (dollars per million British thermal units)¹

And why not? It looked like a perfect storm for natural gas prices were setting up: 

• The war in Ukraine was causing global unrest and adding to uncertainty around gas supplies
• Natural gas inventories were low
• Consumption of natural gas was high
• Europe was expecting another cold winter
• The Nord Stream pipeline from Russia to Germany had just been attacked, reducing the ability to get natural gas to where it was expected to be needed

But at the end of the day, supply and demand equilibria control the spot pricing for commodities like natural gas, not the oil companies nor political leaders.

So what happened? Following a peak summer price level of almost $9.00 per MMBtu, natural gas prices began to collapse.

Henry Hub natural gas price (dollars per million British thermal units)²

In stark contrast to the expected trend, the EIA’s February 15, 2023, Short Term Energy Outlook showed that natural gas prices declined by 41% in January. These declines were driven by:

• Warmer-than-average temperatures across the U.S. that reduced natural gas consumption for space heating (this past January was the warmest January since 2006)
• Increased natural gas production in the U.S., and most recently, concern over the health and viability of the U.S. banking system following the collapse of Silicon Valley Bank

One positive factor of the current low gas prices is its increased desirability as an affordable fuel for heating, power generation, and industrial processes, driving increases in liquefied natural gas (“LNG”) exports.

U.S. monthly LNG exports by terminal (Jan 2016 - Dec 2022), billion cubic feet per day³

In conclusion, the “perfect storm” for natural gas prices was avoided last winter, and hopefully lower gas prices moving forward will help with the inflationary challenges the country faces today.

WTI Strip Prices Decrease

Spot prices and futures prices for the West Texas Intermediate (WTI) contract decreased by approximately $7.50 per barrel in the near term and by approximately $4.00 per barrel over the longer term.

WTI Strip Prices - One Month Change

As shown, the oil price curve remains in a state of “backwardation,” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on March 15, 2023, as well as the predicted crude oil prices based on options and futures markets. Light blue lines are within one standard deviation (σ) of the mean, and dark blue lines are within two standard deviations.

WTI Crude Oil $/BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $54.50 and $87.00 per barrel in mid-June 2023. Likewise, there is roughly a 95% chance that prices will be between $37.00 and $113.50. By mid-August 2023, the one-standard-deviation (1σ) price range is $52.00 to $92.50 per barrel, and the two-standard-deviation (2σ) range is $32.50 to $127.50 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. So far in 2023, crude oil prices have primarily remained in the range of $70 to $80 per barrel. As such, we have seen volatility decrease significantly compared to 2022, which is evidenced by the futures price ranges observed. As of March 15, 2023, the 1σ range had a spread of $40.50 per barrel, and the 2σ range has a spread of $95.00 per barrel. For comparison, in 2022 we observed 1σ and 2σ price ranges in excess of $65.00 and $150.00, respectively.

1. EIA Short Term Energy Outlook, June 9, 2022.
2. EIA Shorth Term Energy Outlook, February 15, 2023.
3. "Liquefied natural gas will continue to lead growth in U.S. natural gas exports," EIA, March 8, 2023.