The surge in nonconventional (shale) production notwithstanding, industry efforts to rein in production – either by not completing drilled nonconventional wells or by scaling back vertical rigs – has shifted the supply curve to the left. Thus, when weather pushes the demand curve to the right, prices react in accord. However, there is symmetry to this logic, i.e. when the weather dissipates and pulls the demand curve back to the left, prices react in accord.
As far as this Thursday’s EIA report goes, asymmetric demand through the Xmas holiday (contingent upon what day of the reference week the holiday occurs) lowers the typical injection, but amplifies the dispersion around the mean. To wit, the five-year average drops to 85 Bcf, but with an error of in between 56 Bcf and 114 Bcf.
In this vein, gas fired space heating demand was split last week. In the East, demand (heating degree days) in New York City was 21% above normal and 9.3% above the corresponding week from a year ago. Furthermore, New York rarely sees a White Christmas, but as of last week there were 10.9 inches of snow on the ground. On the other hand, demand in the largest residential market in the U.S., Chicago, was 12% below normal and 28% below a year ago.
Most importantly, the cross-seasonal Mar/Apr spread on the NYMEX behaved rather erratically last week, from a high backwardation of 4.1 cents to a low the following session of 2.1 cents. From talking with our clients, word here at is that the extant cold and the fallout from the purge in rig counts have NYMEX traders confused.
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.