In February we outlined a case for higher natural gas prices into the spring. This primarily was based on the seasonal tendency for natural gas prices to rise as supplies worked towards a low at the end of winter.

Indeed, supplies did continue to decline through the spring—following typical seasonal norms. Since the low in February, natural gas prices have rallied more than 20%. Kudos to all who sold the puts.

But with May here and summer around the corner, prices will now be subject to the reverse of that seasonal pattern. This will present opportunities for option writers on the other side of this market.

Seasonal fundamentals reverse in May
After winter ends, distributors begin what is known as “injection season.” This means they begin adding or “injecting” supplies back into storage. Thus natural gas supplies often begin to build again as the milder weather of May finally arrives.  

The result has historically often been a seasonal price decline into the summer months. Why? Economics 101: As supplies begin to rise, prices tend to fall. This tendency is illustrated clearly in the seasonal chart below:

Natural gas prices have historically tended to decline into summer as inventories once again begin to build. (*This chart represents averages only. Past performance is not indicative of future results.)

2017 Natural Gas Fundamentals

At the time of this writing, supplies of natural gas stand at 2.061 trillion cubic feet (tcf). While this is still 16.8% below last year at this time, it remains 14.6% above the five-year average. As supply levels appear to be following closely with seasonal norms, the premium sniper has every reason to expect supplies to begin building again this month, and thus corresponding price weakness into summer. 

Historically, natural gas supplies have tended to start building in May, often pressuring prices. This year’s supply draws appear to be following seasonal norms.