Futures Spread: Is the Natural Gas Market Turning Bullish?
On September 20, 2017, natural gas (FCG) (BOIL) October 2018 futures closed $0.10 below its October 2017 futures. On September 13, 2017, the futures spread was at a discount of $0.08. Between these two dates, natural gas futures rose 1.2%.
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Futures spread at a discount
When the futures spread is at a discount, or the discount expands, it could bring bullish momentum in natural gas prices. For example, on May 12, 2017, natural gas futures settled at their 2017 high. On the same day, the discount rose to $0.50. However, if the discount contracts, it could pull natural gas prices down.
Futures spread at a premium
When the futures spread is at a premium, or the premium expands, it could bring bearish momentum in natural gas prices. On March 3, 2016, natural gas futures settled at their 17-year low. On the same day, the premium rose to $0.84. However, if the premium contracts, it could push natural gas prices up.
In the trailing week, the discount expanded and natural gas prices rose as well. It could point to the market’s expectations of the supply-demand dynamics turning bullish.
The discount in the futures spread could encourage natural gas producers (XOP) (DRIP) to sell their current production now, as opposed to storing it for sale at a future date. It also impacts their hedging-related decisions. The shape of the futures forward curve also affects the natural gas storage, processing, and transportation businesses of midstream (AMLP) companies.
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