With the Henry Hub natural gas futures contract for delivery in May-2023 settling at $2.097, it would be a no brainer to get long the May-2023 futures contract at $2.097 and hold onto it for a year. However, unless you have physical natural gas storage and transportation and you can take delivery, it is not that easy because the May-2023 futures contract expires on April 26th, and you will have to sell your May-2023 futures contract position and simultaneously buy the June-2023 futures contract at $2.333 (futures contract rollover), a significantly higher price than $2.097. Then by May 26th, you will have to sell your Jun-2023 futures contract and then roll it over to buy the Jul-2023 futures contract at an even higher price at $2.586. Except for the Aug-2023 and the Jan-2024 futures contracts, each of the next month’s futures contracts trade at significantly higher prices, creating a steeply contango futures market.
A futures market is said to be in contango when the price for the underlying commodity trades at higher prices for future delivery dates. A futures market goes into steep contango when short term fundamentals are bearish, long-term fundamentals will eventually become bullish, and storage and transportation capacity are limited. When natural gas fundamentals are bearish, the deferred futures contract delivery months will sometimes trade well above the cost of carry (storage, transportation, time value of money). The current natural gas year-on-year carry cost is $1.03, when comparing the May-2023 futures contract to the May-2024 futures contract. The May-2023 futures contract settled at $2.097, while the May-2024 futures contract settled at $3.127. The carry cost in percentage terms is about 49% one year from now, which is a very high carry cost when being long or buying the futures contract and rolling it over month to month from May-2023 until May-2024. Also, if the fundamental supply-demand picture does not change between now and April 2024, the May-2024 futures contract will decay lower over time and eventually go from its current price at $3.127 to the current May-2023 futures contract price at $2.097. This is why it is usually profitable to be short deferred futures market contracts when the futures market is in steep contango because the deferred futures market contracts (e.g., May-2024 futures contract) will decay lower over time and converge to the near-term futures market contracts (e.g., May-2023 futures contract). This is also why in the long run, commodity ETFs (Exchange Traded Funds) that are long a futures market that is in contango will go down in value over time.
Summary
While it is tempting to get long the May-2023 Henry Hub natural gas futures contract at $2.097 or buy the long commodity ETF that buys the front futures market contract and rolls it over to the next month and thereafter, the steep contango of the natural gas futures market places a massive carry cost at around 49% going out 1 year from May-2023 until May-2024. The 49% annual carry cost makes it very difficult to make money being long the natural gas futures market or being long the natural gas commodity ETFs. The better trade is to be short the natural gas futures market or short the natural gas commodity ETFs and collect the 49% cost of carry over the next year.
Hyperion Update
Haynesville frac crews are showing some weakness and are down year-to-date.
West Texas frac crews are also down year-to-date.
Haynesville rigs are also down year-to-date.
Same goes with West Texas Permian rigs.
