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March-April 2017 natural gas spread implies positive supply outlook

The spread between March 2017 and April 2017 natural gas futures, an important transitional marker between the natural gas withdrawal and injection seasons, displayed historic volatility that suggests the market believes winter supplies may be sufficient through March 2017, analysts with the American Gas Association said.

The spread between the contracts had dropped 71% by Dec. 19, owing in part to warmer weather and the market's perception of winter weather yet to come, the analysts said in the Dec. 29 issue of the AGA's monthly Natural Gas Market Indicators.

At last look Dec. 30, April 2017 natural gas was trading at a 12.1-cent discount to March 2017.

Steady cold weather hit the U.S. for three consecutive weeks in December and despite being 10.8% colder than last year, temperatures from October to late December have been 15.6% warmer than normal as measured by heating degree days.

The recent cold supported natural gas demand in the Lower 48, the AGA said. Including both sector-driven demand and LNG exports, consumption reached 127 Bcf on Dec. 19, the largest daily consumption so far this winter and, in fact, for the entire calendar year 2016. Daily consumption has since fallen back in the 80s Bcf as temperatures moderated late in December, the analysts said.

Working natural gas inventories took a hit as a result of the cold weather and demand boost.

The first triple-digit net withdrawal from working gas storage occurred during the week ending Dec. 9, followed by two additional withdrawals of more than 200 Bcf for both the week to Dec. 16 and the week to Dec. 23. The string of withdrawals wiped out the storage overhangs to the year-ago level and five-year-average.

After a net 237-Bcf withdrawal reported for the week to Dec. 23, the total working gas supply sits at 3,360 Bcf, or 413 Bcf below the same week in 2015 and 79 Bcf below the five-year average of 3,439 Bcf.

Despite the second consecutive surprisingly large storage pull erasing the surplus, natural gas futures for February 2017 tumbled in its first day as the lead contract on Thursday, Dec. 29, settling the session down 9.6 cents at $3.802/MMBtu, and followed up the losses Friday, Dec. 30, with an additional retreat.

The market's ability to move lower in the face of inventory decline provides further evidence to support the AGA's assessment that the market expects the natural gas supply to be sufficient leading into the next injection period.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas index prices, as well as forwards and futures, visit our Commodities Pages.