• Incentives are strong with January gas $1 higher than June
  • Natural gas hoarders risk busting storage capacity limits

The U.S. natural gas market, dogged by swollen stockpiles, may face a new threat as traders-turned-hoarders threaten to push prices down to 1990s lows.

They are storing gas because they have the best incentive in years: January futures are being valued at about $1 per million British thermal units more than the June contracts. This profit potential is a siren song likely to drive even more gas into storage than the record projected by the government, and send prices to as low as $1.50 if summer heat disappoints, according to Again Capital LLC.

This so-called contango, where it pays to store fuel now and sell it later, is creating a dilemma for traders. Front-month futures are being dragged down by the biggest gas glut in four years after a warm U.S. winter cut demand and production rose to a new high. Gulf Coast storage is 77 percent full, yet gas for next winter is trading at a premium, buoyed by signs of slowing output and optimism that next winter will be colder.

“This is the last thing the bulls need because this kind of contango structure is a layup with certain assured returns,” said John Kilduff, partner at Again Capital in New York. “We are wildly oversupplied and there’s not really a chance of this clearing now until we get to late this year.”

Gas futures for June delivery dropped 3.3 percent to $2.082 per million Btu at 1:04 p.m. on Thursday on the New York Mercantile Exchange, $1.066 lower than January contracts in the biggest seasonal discount since 2012.

Front-month futures may “flirt” with $1.70 while the contango could “help those stars align” to push prices to $1.50, Kilduff said.

Gas inventories rose 73 billion cubic feet last week to 2.557 trillion, more than the five-year average of 52 billion, the Energy Information Administration said Thursday. Earlier this month, the agency projected that supplies would reach a record 4.112 trillion by the end of October.

That estimate may be too conservative. Stockpiles may peak at 4.25 trillion because “there hasn’t been nearly the same financial opportunity over the last couple years,” said Kyle Cooper, director of research with IAF Advisors in Houston. Kilduff sees a peak of 4.22 trillion.

Nationwide, more than half of the 4.343 trillion cubic feet gas storage capacity is full, though there may be flex capacity because the reservoirs are designed to hold 4.658 trillion, EIA data show. The first test may be in the south-central region, which includes Gulf Coast facilities.

“We are just swimming in gas and at some point these fields are not going to have any more room,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “Something’s got to give because by June and July we are going to be at peak capacity in the Gulf of Mexico.”

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