Futures Spread and the Natural Gas Market

On April 24, natural gas June 2018 futures closed at a premium of ~$0.2 to June 2019 futures. The difference is called the “futures spread.” On April 17, the futures spread was at a premium of ~$0.1. On April 17–24, natural gas June futures rose 1.6%.

The market sentiment for natural gas’s demand and supply situation is reflected in the futures spread. In the past five trading sessions, the premium expanded alongside an over 1% rise in natural gas prices. A rise in the premium could reflect a tightening demand-supply situation. We discussed inventories’ deepening deficit compared to their five-year average in the previous part.

The expansion in the premium could hint at possible upside in natural gas prices, which could have a positive impact on natural gas–weighted stocks like Range Resources (RRC), Antero Resources (AR), and Cabot Oil & Gas (COG). On April 17–24, these three stocks fell 5.2%, 5.1%, and 2.4%, respectively—compared to a 1.6% gain in natural gas June futures during this period. The S&P 500 Index (SPY) fell 2.7% during this period. The weak sentiment in the broad equity market could have a negative impact on stocks despite underlying fundamental drivers.

As of April 24, the natural gas futures contracts for delivery between June and August 2018 were priced in an ascending order—a negative situation for ETFs that follow natural gas like the ProShares Ultra Bloomberg Natural Gas (BOIL) and the United States Natural Gas ETF (UNG).