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Natural Gas: Is the Market Expecting Oversupply?

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Futures spread

On December 12, natural gas (UNG) (BOIL) January 2018 futures settled $0.33 lower than January 2019 futures. The “futures spread” was at a discount. On December 5, the futures spread was at a discount of $0.24. On December 5–12, natural gas January futures fell 8.1%.

Discount and premium

An expansion in the discount could be a problem for natural gas bulls. On March 3, 2016, natural gas futures saw their lowest closing price in 17 years. On the same day, the discount was $0.84. However, a fall in the discount could be positive for natural gas bulls.

On the other side of the spread, an expansion in the premium could be positive for natural gas bulls. On May 12, 2017, natural gas futures saw their highest closing price in 2017. On the same day, the premium was $0.5. However, a fall in the premium could be a problem for natural gas bulls.

In the past five trading sessions, the discount rose and natural gas prices have fallen 8.1%. This type of spread and price action indicates fears about increasing natural gas supplies.

Impact on energy sector

The natural gas futures forward curve influences US natural gas producers’ (XOP) (DRIP) (IEO) hedging strategies. The same is also true for midstream natural gas transportation, storage, and processing companies (AMLP).

On December 12, there was a difference of $0.016 between the natural gas futures contract for February and January 2018. February 2018 futures are priced more than January 2018 futures. This type of price difference can reduce the returns of natural gas–tracking ETFs like the ProShares Ultra Bloomberg Natural Gas (BOIL) and the United States Natural Gas Fund LP (UNG).

For more on natural gas prices, visit Market Realist’s Energy and Power page.

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