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Natural Gas Futures Spread: What Investors Should Know

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Futures spread

On August 9, 2017, natural gas September 2018 futures traded $0.005 below September 2017 futures. However, on August 2, 2017, natural gas September 2018 futures traded $0.03 above September 2017 futures. Between these two dates, natural gas active futures rose 2.6%.

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Discount

When there’s a discount between the two futures, like on August 9, 2017, or when that discount rises, natural gas prices may move higher. For example, on May 12, 2017, the discount rose to $0.5, and on the same day, natural gas futures closed at their highest level in 2017.

Premium

When there’s a premium between the two futures, like on August 2, 2017, or when the premium rises, natural gas (GASL) (GASX) prices may move lower. For example, on March 3, 2016, when natural gas prices closed at their 17-year low, the premium was above $0.8.

So, the natural gas futures spread is an important indicator for natural gas supply-demand dynamics. In the trailing week, natural gas prices rose and the futures spread shifted from a premium to a discount, which could ease concerns regarding a supply-glut situation.

Energy sector

US natural gas producers (XOP) (DRIP) follow natural gas delivery far into the future because it could influence their hedging decision. Moreover, it also impacts the storage and transportation businesses of midstream stocks (AMLP).

Apart from the above discussion, the futures spread between natural gas active futures and the one-month-forward futures is crucial for natural-gas-tracking products such as the United States Natural Gas Fund (UNG).

Check out our Upstream Premier for more information on upstream stocks.

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