Natural Gas Is Already in Contango - Brace for Super-Contango

(Bloomberg) -- Oil has collapsed into a structure called super-contango as crude for delivery this year trades at a steep discount to contracts further out. U.S. natural gas might be next.

It’s not unusual for summer gas futures to trade below contracts for the colder months, when demand for the heating and power-plant fuel peaks. But this year, the Covid-19 pandemic has slashed gas consumption as businesses shut, sending near-term contracts to a quarter-century low after a mild winter. Prices for next year, however, have climbed on speculation that the oil rout will cut the supply of gas that’s produced alongside crude in shale basins.

Gas will reach super-contango when summer contracts trade $1.50 per million British thermal units below winter futures, according to Francisco Blanch, head of commodities and derivatives research for Bank of America Corp. The discount for this June versus January 2021 is about $1, more than double the gap for the equivalent contracts a year ago.

Super-contango creates an incentive for traders to buy gas now, store it and lock in future profits. The problem is that gas is much harder to stockpile than oil, which can be stashed away in metal barrels or on rail cars. Though gas is kept in underground aquifers and depleted salt caverns, those facilities can only hold so much of the fuel.

Cratering prices create the risk that U.S. liquefied natural exports will be curtailed on a large scale. If that happens, storage facilities “cannot stomach” the resulting oversupply unless prices at the benchmark Henry Hub in Louisiana go even lower, according to BloombergNEF.

Gas inventories will climb to an all-time high by the end of October, and potentially test the demonstrated working storage capacity in the lower 48 states, said Samantha Dart, head of gas research at Goldman Sachs Group Inc.

What BloombergNEF Says

Current forecasts, which factor in Covid-19, already place end-of-summer storage above the U.S. total working storage capacity of 4Tcf. Any non-trivial export reduction would make an already loose situation even worse. This would place significant downward pressure on Henry Hub futures to incentivize more power burn and/or reduce production to balance the U.S. gas market.

-- analysts including Fauziah Marzuki and Nakul Nair

-- Click here to read the research

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