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Futures Spread: Has Natural Gas’s Oversupply Concern Eased?

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Aug. 17 2017, Published 1:23 p.m. ET

Futures spread

On August 16, 2017, natural gas (FCG) September 2018 futures traded at a discount of $0.02 to September 2017 futures. On August 9, 2017, the discount was at $0.008. On August 8, 2017, the September 2018 futures traded at a premium to September 2017 futures. On August 9–16, natural gas futures rose 0.2%.

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When the futures spread is at a discount

When the futures spread is at a discount, like it was on August 16, 2017, or when the discount between the two futures contract rises, natural gas prices could also rise. On May 12, 2017, the discount rose to $0.5. On the same day, natural gas futures closed at their highest closing price in 2017.

When the futures spread is at a premium

When the futures spread is at a premium, like it was on August 8, 2017, natural gas prices could be subdued. Any rise in the premium might coincide with the downturn in natural gas prices. On March 3, 2016, the premium rose over $0.8. On the same day, natural gas prices settled at their 17-year low.

So, natural gas’s futures spread is important for traders to anticipate any change in the demand-supply dynamics. In the trailing week, the discount between the two futures contracts expanded and natural gas prices also gained. It indicates that the concerns regarding the supply-demand dynamics have eased.

Upstream and midstream stocks

Natural gas futures contract prices far into the future could be important for US natural gas producers’ (XOP) (DRIP) hedging decisions. The prices could also impact midstream companies’ (AMLP) storage and transportation-related businesses.

The futures spread between the September 2017 and October 2017 futures contract could be important for ETFs like the United States Natural Gas Fund (UNG).

Read Market Realist’s Upstream Premier for more information on upstream stocks.

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