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Betting on tighter supplies, U.S. natgas investors snap up 2017 contracts

U.S. natural gas investors are piling into 2017 futures contracts, helping trigger a resurgence in prices and eroding record inventories that have punished prices, traders said.

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U.S. natural gas investors are piling into 2017 futures contracts, helping trigger a resurgence in prices and eroding record inventories that have punished prices, traders said.

Investors are betting on tighter supplies in 2017 as exports take off and industrial demand improves.

The buying has pushed the difference between March 2017 and April 2017 <NGH7-J7> futures up 25 percent in the past week to its widest in two months, reinvigorating the spread, known as the "widow maker" due to its extreme volatility, after a largely stable winter.

"There appears to be a lot of interest to buy the first quarter of 2017 as some of the market thinks summer 2016 prices are low enough to generate enough demand to eliminate the surplus," said Scott Shelton, energy broker and commodities specialist for ICAP in Durham, North Carolina.

The flurry of buying in 2017 contracts is in stark contrast to the moribund nearby market. Despite recent gains, front-month prices are still languishing near 18-year lows as investors worry about a growing glut and slow consumption.

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Analysts expect inventories to end the current winter season at record levels around 2.5 trillion cubic feet on March 31 following much warmer-than-normal temperatures and little heating demand due to the warming effect of the El Nino weather pattern.

Energy data provider PointLogic analysts forecast U.S. dry gas output would fall from around 74.6 billion cubic feet per day now to 72.6 bcfd in October 2016 to avoid pushing storage to maximum capacity levels.

But traders are now looking ahead to 2017, when they expect prices to rise as liquefied natural gas and pipeline exports and industrial demand grow, working down stockpiles by the end of the summer.

To meet that growing demand, PointLogic estimated gas output would have to rise to around 79.6 bcfd by October 2017.

Shelton at ICAP said the March-April 2017 spread was getting support from the overall increase in futures prices for the first quarter of 2017.

Futures on the New York Mercantile Exchange were fetching $2.84 per million British thermal units for the first quarter of 2017 and $2.74 for full-year 2017.

That is a bargain compared with analysts' recent estimates of $2.93 for the full-year 2017 contract. Futures were even cheaper a week ago, when the first quarter of 2017 could be had for $2.68 and the full year for $2.67.

Besides the futures, traders have also been snapping up bullish call options for the first quarter of 2017, said gas broker Josh Hochberg of OTC Global Holdings' ION Energy Group in New York.

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As of Wednesday, open interest in January, February and March 2017 European-style call options on the NYMEX have increased about 12 percent to more than 274,000 contracts in the past week, according to the exchange's website.

BOTTOMED OUT?

Some analysts think prices for 2016 may have already fallen far enough and that the recent lows presented a buying opportunity.

On March 4, front-month gas futures hit $1.611 per mmBtu, their lowest level since August 1998, while the balance of 2016 dropped to around $2.

If prices for the rest of 2016 were to remain there, the power sector would use much more gas instead of coal to generate electricity this summer and surpass last year's record levels, analysts at Morgan Stanley said.

They said that, alongside expected output reductions, would cut inventories by the end of October to 3.3 tcf, a level considered uncomfortably low. Morgan Stanley forecast prices would average $2.20 in 2016. 

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