Brutal cold widens U.S. natural gas 'widowmaker' spread

NEW YORK Fri Dec 13, 2013 3:12pm EST

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NEW YORK Dec 13 (Reuters) - Freezing cold across the nation and falling U.S. natural gas stockpiles has opened up a key spread trading opportunity famous for its potential rewards - and risks.

The coldest early winter weather in a decade has pushed U.S. natural gas winter prices to near the highest level in over two years as traders react to high demand for stockpiled fuel. Less impacted by weather, April price gains were limited.

The premium of the March 2014 U.S. natural gas futures over the April contract has shot up to its widest in nearly seven months, surging five fold this month alone and attracting hedge funds keen to bet on the volatile spread.

From just 4 cents per million British thermal units at the end of November, the March premium has spiked to more than 19 cents this week after November gas inventory withdrawals rose to three times the norm.

"We're getting some extreme temperatures and there's more cold expected. Strong storage withdrawals in December will affect prices in March," said Aaron Calder at Gelber & Associates in Houston.

Spread trading on the New York Mercantile Exchange, or the simultaneous purchase and sale of different futures contracts, is often thought of as a safer way to trade than taking an outright bet about market direction.

But that hasn't always been the case. The March-April spread, known as one of the "widowmaker" spreads, has sunk some big hedge funds in the past, most notably the $6 billion Amaranth Advisors collapse in 2006.

Gas is stockpiled in storage caverns from April through October, then withdrawn from November through March to help meet winter heating demand.

Traders started the heating season in November feeling comfortable about supplies, with inventories running almost 2 percent above normal and production flowing at a record high from booming shale fields.

The spread, which peaked this year at 41.8 cents in mid-April, shrank to below a penny in early November, its low for the year amid expectations that supplies would remain flush.

But November's cold put an end to that.

A Reuters poll this week showed that industry traders and analysts on average expect stockpiles to finish the heating season about 3 percent below the five year average.

With cold temperatures expected to remain through December and a huge inventory draw forecast this week, those end-winter estimates are likely to fall further.

"Inventory draws over the last couple of weeks have made winter months look more bullish versus summer. There's some question about what inventories will look like when we come out of winter," said a trader at an investment bank in New York. (Reporting By Joe Silha; Editing by Edward McAllister and Chris Reese)

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