Temperature, storage, and natural gas futures prices

Previous literature suggests that daily changes in US natural gas (NG) futures prices and their variance can be explained by changes in oil futures prices and volatilities, storage announcements, and temperature shocks. These studies measure temperature shocks using the National Oceanic and Atmospheric Administration definitions of heating degree day (HDD) and cooling degree day (CDD). We show how hourly temperatures can be used to better measure how long as well as how much temperatures depart above and/or below the "comfort level" within a day, the effects of temperature variability within a day, and the effects of thermal inertia. Hourly temperatures also allow us to construct measures of extreme temperatures that better match the timing of release of other market information. Another innovation is that we use more economically relevant weights to convert regional temperature shocks to national averages, and measure expected values of variables via econometric models instead of historical averages. Our results show that the proposed measures of HDD and CDD and temperature changes are important for explaining weekly changes in NG in storage and daily changes in NG futures prices and their variance.