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.