The Natural Gas Spreads To Watch As Warmth Arrives

The natural gas market sold off again today as it continued to price in warmer weather expectations for the second half of January. This is something we first warned of in our Note of the Day last Friday, where we picked up on long-range warm trends that could potentially pull the market back. 

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Prices did end up reversing this week, but before we saw the prompt month contract reverse we actually saw the April/October J/V spread start the reversal before hitting resistance, indicating that the natural gas market still appeared structurally loose in the face of elevated production. That spread kept selling off today as well, fitting well with our idea from last Friday. 

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But that is just one of the spreads we watch. We also tend to watch the month 1/month 2 spread for indications of how cash is impacting the natural gas strip and what is driving prices. Back in December we saw an opportunity with the February/March G/H spread seemingly being undervalued in the face of very impressive cold to end 2017 and bring in 2018 (posted in our Seasonal Trader Report, published every Tuesday). With impressive cold, we would expect cash prices and thus the prompt month natural gas contract to be impacted the most, likely widening this spread. 

Sure enough, as cold arrived and cash prices spiked, so did the G/H spread. 

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After that, we saw that spread pull back the last couple of days too as forecasts later in January warmed and short-term cold eased, pulling Henry Hub spot prices back. 

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And of course another spread to watch for with the arriving warmth is the March/April H/J spread. This spread is one of the best for determining how concerned traders are about natural gas inventory levels for the remainder of winter, as March is when we finish drawing gas from storage and any shortage would be reflected in March prices but not necessarily April, where we go back to injecting gas. In our Note of the Day on Tuesday we outlined how the spread was right at the top of its downtrend already, and any warmer trends would quickly pull it back. 

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Sure enough, those warmer trends we were watching arrived and pulled H/J back lower as well. 

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In fact, before the reversal, we actually saw H8/J8 match the exact same pattern we saw at this time last year, when there was a similar early January cold shot and a tight natural gas market reacted to storage shortage concerns. 

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Through the past couple of weeks we were watching the similarities between the two years, which led to us warning bulls of red flags before the market turned around. For those looking at just prompt month price, last year's January support turned into resistance this year, and it was clear that flat price was at different levels. Yet it was through spreads that we could see the market truly responding in the same way, giving us a handle not just on stock (the amount of gas in storage) but flow (the current supply/demand balance) to properly identify price risks. 

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By looking at natural gas spreads in such a manner we are able to determine what is driving natural gas prices and when weather is most likely to matter. Over the past week we used these spreads to identify weather as the primary driver of natural gas price action, and used our long-range forecasting expertise to identify that weather models were likely to trend warmer through the week as well (as seen in our Weekly Natural Gas Update report dashboard sent out Tuesday). 

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We hope that this blog helps you understand a bit better what we do and how you can use natural gas spreads to work within the market and navigate risk. At Bespoke Weather we are continuously looking at the latest spreads and natural gas price action to see how much our detailed weather forecasts matter, identifying exactly when the best opportunities for investors and traders are likely to arise. This week was clearly one of the best weather-driven opportunities in awhile, but with quite a bit of winter left and inventory levels below average we expect quite a bit of weather-driven volatility from here.