Gas Traders Haven’t Been So Bullish on Winter Since Polar Vortex By Jonathan Crawford August 31, 2016 — 3:45 PM EDT / Updated on September 1, 2016 — 12:01 AM EDT
Natural gas traders are betting on the frostiest U.S. winter since the “polar vortex” pummeled the U.S. in 2014 and sent prices for the heating fuel to a five-year high. Gas for delivery next March is trading at the highest seasonal premium to April futures since record cold swept across the U.S. nearly three years ago. The spread, known as “the widow maker” for its extreme volatility, signals that traders anticipate plunging temperatures will boost gas consumption, leaving stockpiles well below normal levels, according to Bloomberg New Energy Finance.
The gas market may be especially vulnerable to price spikes after scorching summer heat spurred air-conditioner use, sending demand for the fuel from power plants to a record and paring a stockpile glut. Inventories could drop below average levels before the winter, marking a sharp turnaround for a market that tumbled to a 17-year low earlier this year. "We think the March-April spread is pricing in a very cold winter," Tai Liu, an analyst with BNEF in New York, said in a report. A frigid winter and production disruptions are needed to trim inventories to less than 900 billion cubic feet, enough to justify the current March-April spread, Liu said. Supplies totaled 3.35 trillion as of Aug. 19. March gas traded at a premium of 28 cents per million British thermal units above the April contract earlier this month. That compares to a discount of 7 cents after an average winter, Liu said.
Weak La Nina
A weak La Nina weather pattern, characterized by lower temperatures in the Pacific, could form this year and bring a colder winter to the northern U.S. There is a 55 to 60 percent chance the phenomenon could form by the end of 2016, according to the U.S. Climate Prediction Center. “It’s an extraordinary premium,” John Kilduff, a partner at Again Capital LLC, said by phone Wednesday. “Even just a normal winter can eat through the stockpile surplus no matter how big it is.”
Still, there is uncertainty in the projections. A cold spell could send the MarchApril spread briefly higher before the contracts expire at a smaller premium, Liu said. FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.