The North American market of natural gas is subject to seasonality more than any other NG market. It usually sees higher prices in winter, which is natural since more NG needed during the heating season. The seasonality is reflected in NG futures prices shown by New York Merchantile Exchange (NYMEX).
Over the last 4 years, the price spread between the November and February NG futures declined from 65 cents per million British Thermal units in October 2010 down to 24 cents (the average) per million British Thermal units in October 2013.
Wider spreads usually indicate market expectations connected with higher NG prices in winter. Consequently lower spreads indicate less volatile price movements.
The narrowing seasonality gap indicates that market participants expect a major seasonality increase in NG prices as compared to previous years. Still, the key factors will remain connected with the supply and demand.
At the same time, the futures market is currently reflecting decreased seasonal volatility as compared to the past.
Bullish factors
1. Seasonality - price growth connected with the current heating season.
2. A colder winter is expected in the USA.
3. They expect a major price increase (some 145) for US households.
Bearish factors
1. The NG production and inventories are relatively high.
2. The STEO has recently decreased its NG price forecast for Q4 2013 and Q1 2014.
3. Lower futures spreads
The heating season is supporting the prices despite high production and inventories. NG is expected to keep appreciating in mid-term perspective with an upward sloping channel.
Trading recommendations:
It is recommended to maintain shorted put options while looking for opportunities to add to the short puts on retracements.
