Sevens Report Flags Risk of Sharp Reversal in Natural-Gas Prices
Tyler Richey says futures structure and weather trends argue the rally may fade fast.
Natural-gas prices doubled in the last 5 trading sessions. Here are signs a ‘sharp collapse’ may soon unfold.
With the February natural-gas futures contract expiring at the end of Wednesday’s trading session, it will be “critical” to watch the price of the March contract, which is trading at a roughly $2.50 discount to the February contract, said Tyler Richey, co-editor at Sevens Report Research.
That leaves the “futures duration curve in a steep backwardation dynamic” — meaning the current price is higher than prices for contracts for delivery further out in the future, Richey told MarketWatch.
The higher near-term prices and lower prices for contracts for delivery in the months ahead also suggest the rally in the February futures contract is based on near-term supply concerns, and “not any longer-term structural market worries of a prolonged supply shortage,” said Sevens Report’s Richey.
At the same time, weather models are forecasting more moderate temperatures in the coming weeks, which should theoretically see the rally in natural-gas prices “subside, assuming there is no lasting damage impacting domestic natural-gas production [and] logistics,” said Richey.
“That could set futures prices up for a sharp collapse in the sessions ahead,” he added.
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