Why the Natural Gas Futures Spread Is Concerning Markets
When the futures spread is at a premium, or the premium rises, it could hamper the rise in natural gas prices.
Oct. 12 2017, Updated 11:06 a.m. ET
Futures spread
On October 11, 2017, natural gas November 2018 futures closed $0.13 above November 2017 futures. The difference between the futures contract or the “futures spread” was $0.08 on October 4, 2017. In other words, the futures spread was at a premium of $0.08. Between October 4 and October 11, 2017, natural gas futures fell 1.7%.
Premium
When the futures spread is at a premium, or the premium rises, it could hamper the rise in natural gas prices. For example, on February 21, 2017, natural gas prices settled at their 2017 lowest closing price. On the same day, the premium rose to $0.62. However, a contraction in the premium may help natural gas prices advance.
Discount
When the futures spread is at a discount, or the discount rises, it could halt the fall in natural gas prices. For example, on May 12, 2017, natural gas prices settled at their 2017 highest closing price. On the same day, the discount rose to ~$0.5. Moreover, a contraction in the discount may cause natural gas prices to retreat.
In the seven calendar days to October 11, 2017, the premium rose and natural gas prices fell, which shows market concerns regarding natural gas demand.
Energy stocks
Natural gas’s futures forward curve shape could guide natural gas producers’ (XOP) (DRIP) (IEO) hedging-related decisions. It also impacts midstream companies’ (AMLP) natural gas storage, processing, and transportation decisions.
The positive futures spread between November 2017 and December 2017 futures would reduce the returns of the United States Natural Gas ETF (UNG) compared to active natural gas futures.
On October 11, 2017, natural gas futures contracts to February 2018 settled at progressively higher prices.