According to the EIA’s latest monthly updates, gross gas production in the lower 48 U.S. states decreased by 2.2% in September to an eleven month low of 61.83 Bcf/d. The report was the first indication that the year-plus effort to rein in production is finally bearing fruit. It was a bullish report.
Be that as it may, the NYMEX term structure finished last week showing no apparent concern for this matter. For example, the cross-seasonal March’10/April’10 spread traded down to and finished near a life-of-contract low, i.e. March (last contract of the winter) at 98.95 cents on the dollar to April (the first contract of the summer). As illustrated in today’s issue of , that is indeed a rarity for this point in the winter.
Aside from last year’s commodity bubble implosion, this is the only time in the last twelve winters that the March was marked at a discount to the April. Therefore, at this moment in time, traders on the NYMEX are showing no concern for the industry’s ability to supply gas to the market this heating season.
Per the latest weekly updates from the DOE, refinery throughput, i.e. demand for crude oil, is virtually nonexistent. Crude oil runs over the last four reports averaged 14.11 MMbbl/d, approximately 8% below seasonal norms.
Refinery capacity utilization rates averaged below 80% over the last four weeks or more than 9 percentage points below the seasonal range. Furthermore, the consensus amongst analyst’s conference calls in the wake of (dismal) 3Q earnings reports, suggest that capacity is going to be kept low through the remainder of this year and into the start of next year; case in point, the rash of recently announced (indefinite and permanent) refinery shut-ins.
Bottom line, demand in the U.S. for oil is weak now and into the nearby future. As a result, the contango in the NYMEX term structure is re-steepening (see graph in today’s issue of ). As of the end of November, the average gradient in the 24-month forward curve finished at a four-month high, 0.58%. Therefore, traders are back to discounting nearby supply of crude oil… into what is historically a strong period of demand.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.