the difference in prices between Natural Gas Monthly Futures?

Discussion in 'Commodity Futures' started by jasonjm, Aug 3, 2006.

  1. jasonjm


    Hey all, kinda looking through commidities still here as a new commodities trader

    I can't quite figure out what accounts for the massive difference in price between the OCT 06 and NOV 06 natural gas futures

    one is going for around 7.5 and the other 9.5

    what accounts for this huge difference?

    aren't natural gas futures all really based on the spot price for the commodity?

  2. jasonjm


    still doesnt make sense?

    sept 06 is 7.320
    oct 06 is 7.54
    and nov 06 is in the 9.X

    how can the cost of carry for NG be so high? like 20-30% per month?

    the "contago" on gold for example makes sense to me
  3. it's a demand vs. storage if we go into Al Gore's nightmare, a frigid winter like none other.........

    well you get the picture........

    plus if a hurricane hammers Gulf production, there's a premium built in....
  4. This years NG pricing has been dominated by high inventory levels. Storage is far above normal for this time of year. Storage capacity is finite. The entire US storage is sufficient for maybe 2 months of consumption, and it's almost full. Demand for storage capacity is high, and supply of storage capacity is low. This drives up the equilibrium price of storage. The spread between the September and November contracts is essentially a quote for the price of storage.

    Keep in mind that actual cost of storage - not just the price - is higher for natural gas than most other commodities. Natural gas isn't like gold, you can't just stack it in the vault. It takes a lot of space, and it doesn't like to stay where you put it. Summer prices are always lower than winter prices because storage is expensive.

    Anyway, it's not so much that the November contract is expensive. It's still considerably cheaper per BTU than heating oil. Rather, the September contract is cheap. Not dirt cheap like it was two weeks ago, but still cheap. It's cheap because of the inventory and the resulting high cost of storage.

  5. Martin,
    So if I could sell forward the November contract and buy the September contract, I would be essentially "leasing" storage space until the November delivery date? This makes sense... but somehow I doubt I would make a sure profit. For one... I don't know what the spread will be in November.

    Come November, will the contango still be this significant?

  6. If you can find a place to store it for less than the spread, u can make a sure profit.
    Everyone want to take advantage of the contango that the smart people already occupied all the storage capacity.
  7. The September contract stops trading by the last week of August. If you hold your long position, you're going to get delivered 10 billion BTUs of natural gas, which you then have to store for two months. Where's the profit in that?