U.S. natural gas futures dropped to an 18-month low on Wednesday, cutting the March-April spread to a record trough as forecasts for less cold weather in late January force some in the market to give up on hopes for extreme cold in coming weeks.
The gas industry calls the March-April spread the “widow maker” because rapid price moves resulting from changing weather forecasts have knocked some speculators out of business, including the Amaranth hedge fund, which lost over $6 billion on gas futures in 2006.
“The last contract on the winter strip (March) should never trade at a discount to the first month on the summer strip (April)… but that is what is threatening,” Bob Yawger, director of energy futures at Mizuho, said.
The premium of futures for March over April fell 54% to a record low of two cents per million British thermal units (mmBtu) on Wednesday, according to data provider Refinitiv.
That was a massive narrowing of the spread, which hit a record $2.13 per mmBtu in May 2022 as demand for U.S. liquefied natural gas soared after Russia cut most gas exports to Europe in response to European Union sanctions against Moscow for the Ukraine war.
If that premium becomes a deficit – if April trades over March – the market would go into what’s called contango where future prices trade higher than earlier contracts.
The market uses the March-April spread to bet on the winter heating season when demand for gas peaks.
March is the last month of the winter season, while April is when utilities inject gas into storage for use during the winter.
The price spread between the March and April contracts is usually the widest of any monthly futures.