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Have Natural Gas Supply Concerns Increased?

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May. 31 2018, Updated 6:32 a.m. ET

Futures spread

On May 29, natural gas July futures closed at a premium of ~$0.25 to July 2019 futures. The difference is called the “futures spread.” On May 22, the futures spread was at a premium of ~$0.26. On May 22–29, natural gas July futures fell 1.1%.

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Futures spread and natural gas market

The market’s sentiment around natural gas’s demand and supply situation is reflected in the futures spread. In the past four trading sessions, the premium contracted with more than a 1% fall in natural gas prices. A contraction in the premium could show the market’s concern about rising natural gas supplies—a factor that could drag natural gas’s prices. In Part 2, we discussed the possible uptick in natural gas production.

Energy stocks and ETFs

Any fall in natural gas prices could have a negative impact on natural gas–weighted stocks like Chesapeake Energy (CHK), Southwestern Energy (SWN), and Cabot Oil & Gas (COG). On May 22–29, these three stocks fell 5.7%, 4.3%, 3.7%, respectively—the largest declines on our list of natural gas–weighted stocks. Natural gas July futures fell 1.1% during this period.

Forward curve

As of May 29, the natural gas futures contracts for delivery between July and August were priced in an ascending order—a negative situation for ETFs that follow natural gas futures like the ProShares Ultra Bloomberg Natural Gas (BOIL) and the United States Natural Gas ETF (UNG).

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