Natural-gas trading patterns are predictable: Prices rise in the winter, when demand for gas-fueled indoor heating increases, and fall in the spring.
The Wall Street Journal reports, "in a market famous for large swings based on changing weather forecasts, correctly predicting the extent of the winter rise and the spring retracement can fell traders or even entire funds".
Bets on the winter-spring transition tend to come down to predicting whether the price difference between the March and April natural-gas contracts will widen or narrow. A bet on a wider spread indicates an expectation that winter prices will be much higher than spring prices, because supplies will tighten amid strong heating demand. Prices for April futures are usually lower than March prices because there’s little natural-gas demand for heating and additional demand from power plants to power air conditioners hasn’t yet kicked in.
On Wednesday, the March-April spread blew out as well, climbing as high as 97.4 cents in early trading. March futures prices slipped later in the day, narrowing the spread to about 60 cents.
A winter price spike has led to sustained higher prices in the past. After trading below $4 for most of 2002, prices jumped above $9.50 in early 2003 and held near $4.50 or above for the rest of the year.
That spike happened before the shale gas boom, when it was harder for producers to replenish gas supplies depleted during the winter. Still, some market watchers have expressed concern that producers will be unable to fully replenish inventories by the start of next winter. As of Jan. 24, natural-gas supplies stood at 2.193 trillion cubic feet, the lowest level for the week since 2005.
“It is questionable how much supply could come to meet demand,” Citigroup analysts said in a note Tuesday, noting that Canadian supplies are also low and pipeline capacity out of some gas-producing basins is limited. “Even with a production response, the production needed may not come in time.”
