Futures Spread: Should Natural Gas Traders Worry?

Natural gas futures spread

On August 2, 2017, natural gas (BOIL) (GASL) futures for delivery in September 2018 traded at a premium of $0.03 to futures deliverable in September 2017. On July 26, 2017, the futures spread was at a discount of $0.07. In fact, between these two dates, natural gas September futures fell 3.5%. We’ll try to understand why below.

Futures Spread: Should Natural Gas Traders Worry?

Futures spread premium

When the futures spread shifts to a premium like it did on August 2, 2017, or when that premium expands, natural gas prices have usually been weak. For example, in March 2016, natural gas prices settled at their 17-year low. In March 2016, the premium rose above $0.80.

Futures spread discount

When the futures spread shifts to a discount like it did on July 26, 2017, or when that discount expands, natural gas futures usually rise. For example, on May 12, 2017, the discount rose to $0.50. On the same day, natural gas prices closed at their highest level for 2017.

So the natural gas futures spread can be an important indicator for natural gas prices. It can be an indication of the supply-demand and storage dynamics. The recent switch in the futures spread to a premium could be because of renewed supply-glut concerns. Consequently, natural gas prices fell in the trailing week.

Energy stocks

US natural gas producers (XOP) (DRIP) track natural gas futures contracts for delivery far into the future because it could impact their hedging decisions. Moreover, companies engaged in natural gas storage and transportation (AMLP) could also be impacted by the spread between contracts for delivery many months and years into the future.

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