WTF is happening in NG?

[Bill R]

I don't recall ever seeing such a disparity between expirations. The front month is down 10% but November is up .5%? Is this like a uh duh trade where one can just buy the front month and sell nov and see if they come back together?

Are there any fundamental traders that can explain why this would happen? I'm just curious...

 

[CannonTrading_Ilan]

From my colleague Mark O'Brien who has been trading futures and futures spreads for 30 + years:
The natural gas market has been entering a period of low demand, commonly called the “shoulder season,” which has adversely affected the front month October futures contract and the physical delivery associated with it.

 

[heispark]

I don't recall ever seeing such a disparity between expirations. The front month is down 10% but November is up .5%? Is this like a uh duh trade where one can just buy the front month and sell nov and see if they come back together?

Are there any fundamental traders that can explain why this would happen? I'm just curious...

Just like it happened to WTI Oil months ago, Nat Gas is sitting on huge inventory and people are dumping October contract. Even so, its spread gap is historically unusual as you can see the pictures below.... Only a few days remaining before expiration and I don't think its gap will be narrowing much. This is the time when spread traders lose money.....

 

[heispark]

https://oilprice.com/Energy/Natural-Gas/Natural-Gas-Prices-Plunge-On-Souring-Demand-LNG-Exports.html

Natural Gas Prices Plunge On Souring Demand, LNG Exports

Natural gas prices plunged on Monday by more than ten percent as the outlook for demand and LNG exports worsened as multiple Hurricanes caused disruptions in the U.S. Gulf of Mexico.

By 11:00 a.m. EDT, natural gas prices had fallen by 11.47% to $1.813 MMBtu.

Front-month natural gas futures (NG1) were at $1.829 MMBtu at 10:53 a.m. EDT.

Hurricane season in the Gulf has caused numerous disruptions to both natural gas demand and LNG exports, with Tropical Storm Beta the latest threat to the industry, with ships that would carry LNG avoiding the troublesome area for now, and likely the remainder of the week as Beta—like Sally—appears to be a slow-moving storm that will take most of the week to dissipate.

It is noteworthy that the November contract for natural gas is now trading at $2.684 MMBtu—a staggering $0.855 premium over the front-month contract.

The fall in front-month contract natural gas prices is—so far—the most significant one-day drop over the last 21 months.

Working natural gas in storage in the United States has increased from 3,079 Bcf, according to the Energy Information Administration (EIA) to 3,614 Bcf for the week ending September 11. The five-year average for this time of year is just 3,193 Bcf.

While swelling natural gas stockpiles are a critical concern for the industry, demand for natural gas is even more critical. With the hurricanes ravaging the Gulf of Mexico, the short-term natural gas demand outlook has worsened even beyond the unfavorable outlook given the industry by analysts due to the industrial activity dropoff due to the coronavirus pandemic.

 

[realtrades]

NEXT would have been a great short on this NG move, if you could get borrows, I couldn't.

 

[maxinger]

I don't recall ever seeing such a disparity between expirations. The front month is down 10% but November is up .5%? Is this like a uh duh trade where one can just buy the front month and sell nov and see if they come back together?

Are there any fundamental traders that can explain why this would happen? I'm just curious...

There is nothing abnormal.

Front month contract is heavily traded.
Nov contract is lightly traded.
so don't expect Nov contract price movement to be agile and responsive.

such behaviour occurs everywhere and not just to NG

 

[heispark]

There is nothing abnormal.

Front month contract is heavily traded.
Nov contract is lightly traded.
so don't expect Nov contract price movement to be agile and responsive.

such behaviour occurs everywhere and not just to NG

Actually, their volumes are similar now. Many people must have rolled by now.....

 

[DeltaOneFutures]

@globalarbtrader & @bone have warned about trading the front month

 

[maxinger]

@globalarbtrader & @bone have warned about trading the front month

you are probably confused or there is some misunderstanding

I always trade the contract with the greatest volume.
for some products (eg NG ), the nearest contract has the greatest volume.


For some other products (eg crude oil), the nearest contract volume ( which is expiring soon) has rather low volume. so choose the further month contract

 

[heispark]

https://www.fxempire.com/forecasts/...outlooks-as-oct-plunges-december-soars-673702

Natural Gas Price Fundamental Daily Forecast – Spreads Paint Different Outlooks as Oct Plunges, December Soars

Natural gas is an extremely volatile futures market. I shouldn’t have to tell you this because I’m sure you see it every day. While most small speculators choose to trade the most populated futures contract in order to lessen the blow of the extreme volatility, most professionals trade spreads.
Those familiar with grain futures know there is an old crop and a new crop. Shrewd traders make a living off the spread between the two crops. In fact, there is a lot of historical data available on this type of relationship between the two crops. Some may argue that “corn is corn”, but just watch the price action between old and new crop corn and you’ll see they are often times driven by different fundamentals. This creates a price spread. It’s not about picking a winner, it’s about predicting the direction of the spread.
The same goes for natural gas. Currently, the October futures contract has the most daily trading volume, but the November futures contract has the most open interest. December natural gas also has large open interest, but January 2021 natural gas has even more open contracts. This is because professionals are trading spreads.
This spread relationship was most evident on Monday when October futures fell sharply, while November and December futures contract prices jumped. The marked difference in the direction of prices was because of the different fundamentals facing the contracts.

Don’t Be Fooled by the Headlines
Some analysts who don’t look at the spreads seem to think that the November and December futures contracts rose because of the new tropical storm in the Gulf of Mexico, but if you took the time to understand natural gas fundamentals and the impact of a hurricane, you would know that this is not the case. If you’re going to trade “cause and effect” then make sure you have the right cause.
October natural gas futures plunged on Monday because of lower liquefied natural gas (LNG) volumes. With the tropical storm threatening an area that produces and ships LNG, a shut down in production is bearish for prices.
Meanwhile, November and December natural gas futures rose sharply because these buyers realize that the LNG production shutdown is a short-term event and that once the tropical storm passes, LNG demand will pick up again. It’s actually been improving since early August.

Conclusion
When trading natural gas, make sure you can reach the same conclusion as the analyst you are reading, using the same tools. Analysts can be wrong especially when they choose to take the easy route. When trading natural gas, make sure you watch the spreads. They’ll tell you more about a market than just reading a weather report and slapping down shoddy analysis.
In my opinion, October natural gas plunged on Monday and closed below the $2.000 level because of poor demand due to the pandemic, cooler temperatures, tropical storm related production shutdowns and worries about storage containment.
Meanwhile, the November and December futures contracts rose sharply because the market expects demand conditions will improve later in the fall.