A Potential Bubble In NYMEX Natural Gas

natural gas

Natural gas prices continue to battle higher despite fears of a sucker rally. The front month contract is currently at $3.40, up from about the $2.50 level just a few weeks back.

Despite natural gas remaining at depressed price levels historically, The Schork Report explains that the NYMEX contracts in particular could be experiencing a near-term bubble.

FT: What we are seeing here is a technical bubble. For example, the underlying to the NYMEX contract at the Henry Hub lost 11 cents yesterday, while Transco Z6 inched up a penny to 3.16. Go that? NYMEX Henry Hub gas futures closed at 3.297 yesterday afternoon, while the physical gas for delivery into New York City traded around 14 cents lower yesterday morning. NYMEX gas is a bubble…

Here’s the twist. Concurrently, the market continues to be distorted by the ETF United States Natural Gas (UNG).

Some believe that near term natural gas contracts are abnormally lower than long-dated futures due to the way UNG must adjust its positions. Shouldn’t this be keeping the near term (front month) contract lower rather than creating a NYMEX bubble as the Schork Report highlights?

While Petromatrix explains that UNG may have reduced its market activity recently, the entire situation appears pretty murky. Feel free to enlighten us, the near-term contracts seem to be horribly inefficient. Still, the longer-term mean reversion story (to higher prices) for natural gas remains in place.

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