US NATURAL GAS- OFF IN THE DISTANTS © Leo Haviland, January 14, 2013

In commodity marketplaces, the price level and fluctuations of the spot (physical, cash) world and nearby (front) months generally attract and fascinate us more than periods (distant month contracts) out in the seemingly more misty future. In recent history, bull and bear moves in distant period NYMEX natural gas contracts to a substantial extent have mirrored those in the nearby months. Patterns in NYMEX natural gas strips, whether seasonal ones such as summer 2013 or calendar years such as 2014, 2015, and 2016, significantly resemble those of actual nearby months (and the nearest futures continuation contract perspective). For example, after marching upward and achieving peaks in spring 2011, they eventually fell off together, reaching dismal valleys in April 2012. The front months and distant spans then ascended dramatically, although not exactly the same distance. After this climb, they began to retreat together; recall the descent since late November 2012 (some trading periods started to fall off in price in October). The nearby and distant month trends thus have generally “confirmed” each other.

Nevertheless, any given natural gas near term situation is not always or necessarily the same as that of the more distant future (or ancient history) times. Because natural gas is not a cost of money commodity like gold, this similar directional relationship between spot (and front month) and forwards off in the distance is neither unchanging nor guaranteed. Some divergence may develop. Therefore marketplace players should monitor trends in NYMEX distant month natural gas contracts in addition to those of actual nearby months (and first futures continuation).

The long run major bull trend of the NYMEX natural gas complex that began in April 2012 (as represented by the nearest futures continuation bottom around 190 on 4/19/12) remains intact. However, at present the near term bearish retracement move for both nearby as well as distant month forwards such as the summer 2013 strip and the calendar strips of more faraway years also likely remains in place. See the nearest futures continuation high on 11/23/12 at 393.

The interim decline in natural gas that commenced during fourth quarter 2012 probably is near in time to at least an initial end. Assuming normal winter weather, the most likely time for this bearish NYMEX natural gas pattern to cease is in late calendar January or late calendar February 2013 (probably around nearest futures expiration). In any event, the price (nearest futures continuation basis) will not easily sustain falls beneath the 300 to 285 range (note recent lows on 1/2/13 at 305 and 1/9/13 at 309). Warmer than normal weather (as in last winter) could postpone the low (recall the late April 2012 depth). Given the likelihood of above normal US natural gas inventories in days coverage terms, there remains a significant chance of a final (second, double) bottom in late August or calendar September 2013.

As there are regional differences (basis relationships) between natural gas marketplaces, players should not restrict this comparative approach to NYMEX natural gas. Why not analyze near term relative to far out periods natural gas at a variety of different locations (and review related basis relationships over these vistas)? Also, given the links between natural gas and electricity fields, analysis of electricity marketplaces in more distant months in a given region offers insight into near term electricity trends as well as distant month (and even near term) natural gas battlegrounds.

Natural-Gas-Charts-(1-14-13,-for-Off-in-the-Distants-essay)-1

Natural-Gas-Charts-(1-14-13,-for-Off-in-the-Distants-essay)-3

Natural-Gas-Charts-(1-14-13,-for-Off-in-the-Distants-essay)-4

Natural-Gas-Charts-(1-14-13,-for-Off-in-the-Distants-essay)-2


FOLLOW THE LINK BELOW to download this market essay as a PDF file.
US Natural Gas- Off in the Distants (1-14-13)
Natural Gas Charts (1-14-13, for Off in the Distants essay)