Gas Spread Going Negative Shows Traders Doubting a Cold Winter

A closely watched U.S. natural gas price spread flipped to negative, signaling that traders have all but given up already on the prospect of a cold winter.

Gas for January delivery is now trading below February prices, a first for the 2021 contracts. January futures tumbled to a two-month low on Thursday, for the worst performance among major commodities, as near-term forecasts for chillier conditions were scaled back. Temperatures may be above normal in much of the Midwest and parts of the Northeast in mid-December, according to The Weather Company.

The market extended declines after a government report showed that only 1 billion cubic feet of gas was taken out of storage last week, much lower than the five-year average draw of 41 billion for this time of year. Just over a month ago, hedge funds’ bullish wagers on gas climbed to a six-year high as liquefied natural gas exports rose to a record and shale drillers reined in production amid low oil prices. But with few signs of the weather cooperating to support a rally, money managers are now unwinding those bets, leaving prices futures mired below $3.

“This is Gas Vegas — it’s gambling on picking a bottom at this point,” said Bob Yawger, director of the futures division at Mizuho Securities.

January gas futures are now trading at a discount to February

Gas for January delivery slumped 9.8% to $2.507 per million British thermal units on the New York Mercantile Exchange, the lowest close since the beginning of October. February futures slid 9.5% to $2.515.

The decline doesn’t bode well for gas drillers, who had fared better than their oil-heavy peers amid the crude rout earlier this year. Shares of gas producers including Southwestern Energy Co. and EQT Corp. fell despite a broader rally in equities Thursday.

Warmer weather forecasts for December are also taking their toll on the March-April gas spread, which narrowed to a record low for the 2021 contracts, suggesting that traders are betting on abundant supplies by the end of the heating season. Known as the “widowmaker” because of its volatility, the spread has shrunk by more than 50% in December alone.

The amount of gas in storage remains stubbornly high at 3.939 trillion cubic feet, or 7.9% above the five-year average, according to the Energy Information Administration.

“It’s the La Niña weather pattern,” said John Kilduff, founding partner, Again Capital. “We were supposed to get bursts of warmth, not consistent warmth. There were supposed to be bouts of cold. That didn’t happen.”