Natural Gas Market

After hitting about $1.50 a month or so ago, the March/April spread is now around $0.17, signalling that winter in the Lower 48 is over and there's next to no chance of running out of gas before the summer injection season. This spread typically will not trade below -$0.10 and has the potential to explode back over $1.00 if any weather shows up or if a pipeline fails or if someone gets caught excessively short and cannot defend their position.

Interestingly, the end of March 2022 storage level was trading around 1,400 bcf when March/April was at $1.25 and is now closer to 1,500 bcf with March/April at $0.17. Easy to say in hindsight, but a 1,400 level to exit winter is probably safe to enter the injection season with and March/April was way overvalued. A 1,400 level is very tough to reconcile with March/April trading at very lofty levels. The only thing I can think of from a distribution of outcomes perspective is the levers gas would have to pull on in order to turn off demand to balance the market during the winter:

• Turn off Mexican exports at some price above $7
• Turn on fuel oil and diesel power generation along the eastern seaboard between $10 and $12
• Turn off LNG exports (60-90 days in advance, mind you) at prices over $30

As long as these leavers were on the table as substantial balancing mechanisms one could argue that March needed to price in some probability of having to do some heavy lifting. April would not rise as much because the weather is typically much more subdued and the market can balance at a much lower price.

Natural gas classically overreacts in both directions. And now, in early December it is throwing in the towel. This with European and Asian prices holding over $30 with well over 100 days remaining in the withdrawal season. I am a natural gas bear and so mentioning March/April as a potential buy for its potential convex payoff means I have overcome some degree of bearish AND gotten bullish.

Another bearish indicator: the April/October spread has moved into contango, now trading around -$0.11, April below October, signalling a loosening balance in the summer. And after trading around -$0.34 for the past couple of months, the October/January spread has widened out to -$0.40, slowly moving from an under fill situation to a more balanced end of summer inventory level. The width of this spread is indicative of running out of storage capacity at the end of summer, the wider it is, the higher the chance of of running into issues at the end of October.