U.S. natgas giving up on winter as widow maker spread cut to record low

Even though it’s only November, U.S. gas traders said warm weather this month has already caused some in the market to give up on this winter and focus on next year.

The premium of futures for March over April 2021 NGH21-J21 fell to a record low as it moves closer to possible contango, while the premium of November over October 2021 NGV21-X21 rose to its highest since April 2011.

Traders use the March-April and October-November spreads to bet on changes in winter weather.

“The March/April spread is threatening to switch from backwardation to contango before Thanksgiving! March is a winter contract. April is more of a shoulder month contract,” said Robert Yawger, director of energy futures at Mizuho in New York.

“March should never trade below April before winter even gets here,” Yawger said.

The gas industry calls the March-April spread the “widow maker” because rapid price moves resulting from changing weather forecasts have knocked some speculators betting on the contracts out of business, including the Amaranth hedge fund, which lost over $6 billion on gas futures in 2006.

The weather has been much warmer than normal with just 217 heating degree days (HDDs) so far in November versus a 30-year normal of 275 HDDs, and is expected to remain unseasonably warm through early December, according to data from Refinitiv.

HDDs, used to estimate demand to heat homes and business, measure the number of degrees a day’s average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).

That warmth has prompted gas speculators to reduce their net long positions every week this month after those net longs reached a more than three-year high in late October.

In addition, warmer-than-normal winter weather this year combined with coronavirus demand destruction is expected to cut U.S. gas demand this year and next from 2019’s record high.
Source: Reuters (Reporting by Scott DiSavino Editing by Chizu Nomiyama)