High stakes poker being played in the cross-seasonal Oct/Nov spread: Is Wall Street hooliganism at play? What is going on in the back of the Nymex Henry Hub natural gas futures curve?
Yesterday (Monday), spot gas for September delivery faded the 100-day moving average, 4.389, for a fifth consecutive session. As such, the market kicked off the week dropping by 2.3% to a 4.228 settle. In fact, at one point the contract came within 4.2 cents of its 4.140 life-of-contract low. Furthermore, the close was the lowest for spot molecules since the week before the US Memorial Day holiday, late May.
Nevertheless, the contango on the cross-seasonal Oct/Nov spread narrowed by 12% or 2.8 cents! That usually does not happen. That is to say, when the spot contract drops, the contango out along the curve tends to steepen, i.e. nearby contracts fall greater than deferred contracts. To add further confusion, the discount on the winter strip (Nov’10 to Mar’11) relative to next summer (Apr’11 to Oct’11) blew out. Thus, the contango increased; in other words, the back of the curve acted in accord with the selloff in the spot market.
Back at the end of last month the winter-strip was trading at a 13 cent premium (backwardation) to next summer. That differential was not hard to reconcile. For example, yesterday NOAA reported that global temperatures in July were the second warmest ever recorded. As such, cooling demand in the U.S. was abnormally strong; a fact that was reflected in an injection pace into underground storage that was 10½% (p) below the five-year average.
However, up through Friday… despite abnormally low weekly storage reports… the relationship in between next winter and summer morphed from a 13 cent premium (backwardation) to a 2.6 discount (!) or contango. Yesterday that contango doubled to 5.2 cents… while the contango for nearby Oct/Nov narrowed by 12%!
That makes NO sense… not that markets are supposed to make sense. That is to say, molecules for September delivery tanked while October rallied, while November tanked, while next winter — relative to next summer — tanked.
In other words, a high stakes game of poker is being played in the cross-seasonal Oct/Nov spread. Analysts at The Schork Reportaver that the fundamentals don’t matter — because if that were the case, then next heating-season could not be falling relative to next refill-season while the nearby shoulder-month spread was gaining.
Yes, this makes no sense… but as Obama’s (apparent) favorite economist would say… the market can remain illogical longer than you can remain solvent.
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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.