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Futures Spread: Natural Gas Prices Might Be in Trouble

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Futures spread

On December 31, the natural gas futures for February 2019 closed at a discount of ~$0.06 to the February 2020 futures. On December 24, the futures spread was at a premium of $0.35. On December 24–31, the natural gas February futures fell 14.1%.

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Natural gas prices might be in trouble

The market sentiment toward natural gas’s demand-supply situation is reflected in the futures spread. The futures spread and natural gas prices tend to move in the same direction.

In the past four trading sessions, the futures spread shifted from a premium to a small discount. Natural gas prices fell by more than 14 percentage points. The shift in the futures spread might have been due to the expectation of lower total degree days in the past, which we discussed in Part 1. In the previous part, we discussed that the negative difference between natural gas inventories and their five-year average contracted—a factor that might push the discount higher in the coming days.

Energy stocks

The natural gas February futures fell 14.1% in the trailing week. During this period, natural gas–weighted stocks Cabot Oil & Gas (COG), Range Resources (RRC), Antero Resources (AR), and Gulfport Energy (GPOR) rose 0.9%, 1.6%, 3.4%, and 4%, respectively, and underperformed their peers. The remaining natural gas–weighted stocks ended in the green during this period.

Forward curve

As of December 31, the natural gas futures contracts for delivery between February and May 2019 were priced in descending order, which is a positive development for ETFs that follow natural gas futures including the ProShares Ultra Bloomberg Natural Gas ETF (BOIL) and the United States Natural Gas ETF (UNG).

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