In the Chart of the Day in today’s issue of The Schork Report, we plotted the return on holding inventory, as measured by the cross-seasonal Mar/Apr spread against EIA underground natural gas storage. Demand can be inferred from the trendline running through the data points of the spread and EIA estimated storage.
In theory, when the spread lies above the trendline it is understood that demand for inventory is above normal. Recall, when concerns grow regarding the market’s ability to supply future demand, a premium returns to the nearer term contract.
Thus, a market backwardation — as is the case with the Mar/Apr gas spread — steepens while a contango flattens (and eventually moves to backwardation if future supply concerns are acute).
- NatGas, Crude, RBOB Futures
In this vein, we have seen a material spike — 204 percent — in the spot Mar/Apr backwardation since early May (i.e., since Deepwater Horizon) and we have also seen the contango in the spot Oct/Nov halved.
This is peculiar behavior, given that supplies are currently building at a comfortable pace, i.e., whatever the knock-on to gas demand from the situation in the Gulf, it will likely not affect this season’ s refills nor next winter’s deliveries.
This then begs the question: are other factors impacting the price path of these spreads? After all, once these spreads lock into a trend they stay on trend, regardless of the underlying fundamental picture. However, both of these spreads of currently decoupled from their respective trends and now resemble Al Gore’s (dubious) hockey stick patterns (as illustrated in today’s issue of The Schork Report).
We haven’t seen these particular spreads behave is such a manner since a prominent natural gas trader morphed a $9 billion hedge fund (Amaranth) into a $3 billion fund in August 2006.
Bottom line: Is history set to repeat, or — as every degenerate gambler will tell you — is this time different?
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.