In the News:
Near-month futures contract indicates expectations of rising prices
Heading into the summer cooling season, the New York Mercantile Exchange (Nymex) natural gas contract for July has markedly exceeded Henry Hub spot prices, likely reflecting expectations for summer natural gas consumption to increase substantially from current levels. On May 27, the first day the July contract was trading in the front-month position, futures closed at $2.169 per million British thermal unit (MMBtu). This was more than 20¢/MMBtu higher than the expired June contract–an uncommonly high change for a contract rollover at this time of year (in 2015, there was a 9¢/MMBtu drop in the futures contract when the June contract expired). Both spot and futures prices have risen substantially through early June, with the Nymex contract for July averaging $2.432/MMBtu as of June 8, 13¢/MMBtu higher than the average Henry Hub spot price for the same period.
In general, the spread between the front-month futures contract and current spot prices has historically been slightly positive going into summer, as natural gas heating demand evaporates. The five-year (2011-15) weekly spread has been less than 5¢/MMBtu throughout April and May. But this year, the weekly average futures contract has been higher than the weekly average Henry Hub spot price by more than 10¢/MMBtu since late April. Based on the five-year average, this magnitude of futures/spot price spread has traditionally been more common in November, at the beginning of the heating season.
This above-normal differential occurs as increased construction of gas-fired power plants–driven in part by low natural gas prices–is forecast to lead to an annual record high for natural gas power burn in 2016. Additionally, EIA's Short-Term Energy Outlook forecasts relatively flat natural gas production through late 2016, raising prospects of a tighter domestic natural gas market in the near term. Although high underground storage inventories have placed downward pressure on spot prices, the rate of injection into storage has remained below last year. Working stocks in underground storage were 69% above year-ago levels on April 1, the beginning of the cooling season, but this surplus has narrowed to 29% as of June 3. If natural gas production fails to rise along with demand, gas prices may continue to increase as the summer heats up....MUCH MORE