March Madness In Natural Gas

March 09, 2010

Natural gas is in a seasonal upswing—but how does the long-term picture look?
  • Should investors bet on seasonality?
  • How contango has eaten into returns
  • Why more supply has meant less contango

 

Is Seasonality Something To Bet On?

Commodity traders love patterns, and over time, natural gas has exhibited one of the asset class's most consistent patterns: seasonality. Frank Holmes pointed this out on a recent article on U.S. Global Investors' Frank Talk blog:

 

Seasonality for Natural Gas 1/91 - 12/08, monthly

 

Data aggregated between 1989 and 2008 reveal that in March, natural gas prices increase, on average, 7 percent over February's levels. On one hand, it makes sense: Toward the end of winter, natural gas inventories have been drawn low, but there's usually at least one or two more big snowstorms remaining in the season helping to jack up prices.

On the other hand, the natural gas futures market doesn't seem to follow the same pattern. In fact, natural gas offers one of the more bizarre contango curves on the market:

 

Natural Gas, 3/8/10

 

This futures curve looks out really long term: over the next 100 contracts. And those peaks are for the January contract, precisely when spot natural gas prices are at their lowest.

Of course, if prices truly followed such a predictable pattern, we could all pack up and go home—but it just doesn't work that way in real life. This year, the tail end of winter has been pretty dismal so far for natural gas (although those of us with spring fever may love the warm temps):

 

Henry Hub Natural Gas Spot Prices

Henry Hub, Feb/March 2010

 

Despite severe storms in the Northeast late last month, demand remains weak, and the EIA recently reported that less natural gas is being withdrawn from storage than usual.

But over the past year, the weather hasn't been the only thing costing natural gas investors money. Enter contango.

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