Natural gas futures relationship
On June 28, 2017, natural gas (BOIL) (FCG) August 2018 futures closed $0.20 below natural gas August 2017 futures. On June 21, 2017, the spread was at $0.15. Between June 21 and June 28, 2017, natural gas August futures rose 6.1%.
When the price-time chart of futures contracts with different expiry dates slopes downward, it’s called “backwardation.” In the last ten years, when active futures contracts have traded at higher prices compared to futures contracts expiring 12 months later, natural gas prices have usually risen.
In one such observation, natural gas active futures rose to a multiyear high of $6.15 per MMBtu (million British thermal units) in February 2014. During the month, the spread rose to its highest level since August 2008.
Natural gas in contango
On the other hand, when the price-time chart of futures contracts with different expiry dates slopes upward, its called “contango.”
When active futures have traded at lower prices than futures contracts expiring 12 months later, natural gas prices have been relatively weak. This scenario has been the case in most instances since July 2008. Natural gas active futures have been in a general downturn between July 2008 and June 2017.
Therefore, traders should track the natural gas futures forward curve to anticipate changes in the supply-demand balance.
Trailing week trend
In the trailing week ended June 28, 2017, natural gas prices rose as the backwardation spread expanded. The rise signifies a fall in the bearish sentiments surrounding natural gas’s supply and demand.
Impact on energy companies
The above analysis is useful for companies engaged in natural gas production (XOP) because it affects their hedging decisions. It also affects energy companies’ (AMLP) natural gas storage and transportation–related decisions.