U.S. natgas price slump pushes 'widow maker' toward unusual contango

Value Exchange International

18/01/2023 13:24

Jan 18 (Reuters) - U.S. natural gas futures  NGc1 
dropped to an 18-month low on Wednesday, cutting the March-April
spread to a record trough as forecasts for less cold weather in
late January force some in the market to give up on hopes for
extreme cold in coming weeks.
    The gas industry calls the March-April spread the "widow
maker" because rapid price moves resulting from changing weather
forecasts have knocked some speculators out of business,
including the Amaranth hedge fund, which lost over $6 billion on
gas futures in 2006.
    "The last contract on the winter strip (March) should never
trade at a discount to the first month on the summer strip
(April) ... but that is what is threatening," Bob Yawger,
director of energy futures at Mizuho, said.
    The premium of futures for March over April  NGH23-J23  fell
54% to a record low of two cents per million British thermal
units (mmBtu) on Wednesday, according to data provider
Refinitiv.
    That was a massive narrowing of the spread, which hit a
record $2.13 per mmBtu in May 2022 as demand for U.S. liquefied
natural gas soared after Russia cut most gas exports to Europe
in response to European Union sanctions against Moscow for the
Ukraine war.
    If that premium becomes a deficit - if April trades over
March - the market would go into what's called contango where
future prices trade higher than earlier contracts.
    The market uses the March-April spread to bet on the winter
heating season when demand for gas peaks.
    March is the last month of the winter season, while April is
when utilities inject gas into storage for use during the
winter.
    The price spread between the March and April contracts is
usually the widest of any monthly futures.
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UPDATE 1-U.S. natgas pares gains, still at 7-year high as global
prices soar     urn:newsml:reuters.com:*:nL1N2QU14C
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 (Reporting by Scott DiSavino; Editing by Emelia
Sithole-Matarise)
 ((scott.disavino@thomsonreuters.com; +1 332 219 1922; Reuters
Messaging: scott.disavino.thomsonreuters.com@reuters.net))
 
((For Refinitiv, formerly known as Thomson Reuters Supply Chain & Commodities Research (SC&CR), see: cpurl://apps.cp./cms/?pageid=usa-gas))